Getting Your TB Approved Down The Line
I think I've been missing a piece of how the L/O needs to work. I haven't concerned myself yet with how the TB gets qualified for a mortgage at the end of the term. Ignoring this, it has made sense that the lease and option contracts should be nearly completely separate.
What happens when they go to get the loan, though? If I assumed the house sub2, and there was very little equity to begin with, they may have paid me handsomely, but they will have insufficient equity in the house after 2 years to avoid a down payment.
Hmmm.... I guess I hadn't thought this all the way through... In order to get them qualified, does some of the money need to be put aside for a dp with the new lender? Is it possible to avoid any wording in the lease contract that any of that $ will apply to dp or purchase price?
Would only a portion of the option consideration be applied? If it is applied to the purchase price only, then how is the dp handled?
If any portion of the option consideration is applied to EITHER the dp or the purchase price, then isn't this putting a nail in the "disguised sale" coffin and opening a whole can of worms?
Is there a way to avoid all this AND allow the TB to get funded in 2 years without them coming out of pocket even MORE $ to close? OR... is this their problem, and they'll need to come up with option consideration $ for me AND all of the dp $ for the new lender?
How are you handling this?
Greetings thestudentisready,
I’ve only done a couple of LOs, so I’m not an expert in this area. But I’ll throw in my 2 cents anyway.
To start, I’ve had one attny tell me to keep the Lease and Option Agreement as two totally separate contracts. And I’ve had another tell me it’s fine to keep them one and the same. I’ve done it both ways.
Typically, the Option Consideration DOES apply to their down payment when they exercise their option to buy. Oftentimes, so does a portion of their monthly lease payment. But usually that payment is higher than what local rents are going for.
You can have their lease payments go through a "servicing account" or payment processing center, which will document payment history for them. This can help immensely, if they’ve had any credit issues.
Also, depending on how the LO is structured, sometimes they can get their financing as a "refi" rather than a new loan – which can also make it easier for them.
Regarding where you said, "they will have insufficient equity" I’ve known investors who count on this, so they can LO the property to someone else and collect the "Option Consideration" all over again. I’m not saying you should do this, or plan on it, but sometimes people do and it’s part of their strategy.
But depending on the Option Price, the Option Consideration, and the monthly credit, it doesn’t take much appreciation in the market for them to be in pretty good shape with their down payment – especially if they find a lender that will do it as a refi.
The whole idea is to enable them to get into a house today, that they otherwise couldn’t for whatever reason. While at the same time, allowing you to make money now, based on a future sales price.
HTH
www.StudentI.R.:
.
Tenant/buyers are different than "Contract for Deeders" (if you will). Your post seems to be questioning the difference between the two. Short answer: it's the L/O'ers problem to come up with option $ and purchase $.
Long answer:
With a lease/option, you are RENTING the house to them with an OPTION (their choice) to buy. They know going in what it's going to take to buy that house from you and have to decide if it's do-able or not (can they raise the $$ for purchase during the lease term? Can they extend the lease term to buy more time to raise the $$?) It's up to you whether you want to include a "rent credit" toward the purchase--it's really not up to you help them find a loan, although there's no law that says you can't. If you are looking to sell this within some fixed time frame, is there a reason a contract for deed wouldn't work (for example, are you in Texas)?
BTW, I have heard an/or read that you would want to keep the lease and the option parts separate, and not just for the reasons stated in the previous post, but also for tax reasons.
With the CFD, your exit strategy is to sell that house within the contract time period so you are definitely motivated to get your BUYERS the new loan. The previous suggestion about getting a loan servicing company is good advice, especially when showing that to a lender: x years of on-time payments is pretty powerful. Also, with CFD, they are refinancing, not getting a new purchase money mortgage (as with a L/O): they are essentially borrowing the purchase money from you, less their downpayment, for the term of the contract. At the end of the contract, they are refinancing a balloon payment on a mortgage (to you), not purchasing a house out of the blue (with their option money and rent credit showing as a "downpayment"
There: clear as mud...
Andy