Good Deal? Legal?
I am currently marketing a property FSBO. I am offering a l/o as well. The property is SFH appraised at 72k. I currently have a mtg on it with bal. of 49k. I have an offer to l/o it to a couple with the following terms that they offered:
5k option consideration
$700/month payments
10 year option
purchase price 70k.
Of the monthly pymt. $350 would go towards principal when option is exercised.
I currently have the 49k mortgage and $5800 in repairs into the property. My pymts. are $396/month.
Is this a good deal and is it legal????
Thanks
Scott
Help us understand the following:
10 year option?
$350 rent credit?
From first glance, your purchase price is below market. Why? You have received a strong down payment and the monthly payment appears to create a great monthly cash flow so we suggest the following:
Charge market rent plus the rent credit amount. Keep in mind lenders will not accept a rent credit below market rent. Example: Monthly rent is $750 per month, Market rent is $700, therefore the maximum monthly rent credit allow is $50. The lender may also ONLY allow up to 6% of the purchase price in total credits from the seller before it is considered seller carryback. (speak with a mortgage broker for clarification)
Create a shorter lease option period such as 24 months, determine market rent and adjust the monthly rent credit(s), lastly adjust if necessary your future sales price of the property.
It is best practice to write two contracts. One for the lease, and the other for the option to purchase. Obtain help from your real estate attorney on the contracts.
Good job!
Eric & Rosa
[addsig]
The market rent is $550. I understand making two separate contracts, and I understand the lease contract portion, but how would an example of an option contract look w/o referencing the lease? I also don't understand how the lender is even going to know if I don't tell him. Not trying to be deceitful, just want to understand how the lender would even become involved.
Scott
The lender will request a copy of the lease. if you are charging above market rent....GOOD for YOU! No complaints from us.
The lease can mention a provision to execise a option to purchase if compliance to the lease has been met and reference the "OPTION to PURCHASE AGREEMENT"
Eric & Rosa
[addsig]
70k - 5k - 350*12*10 = 23k
They will give you 23k at close to pay off a 10 year amortorized 40k mortgage payment. Do you want to bring money to the table at closing?
This is a terrible deal.
I see how you would think it is a terrible deal looking at it that way, however, my plan was to pay all of the monthly pymt. towards my mortgage. That would put an additional $300/month towards my principal. So basically I collect my profit on the back end, don't I? I also didn't mention that they actually plan to payoff within a year, I'm just not planning for the payoff just in case.
Scott
My numbers are a little goofy, but the bottom line is that they are paying off their principle balance to you faster than you are paying off your principle balance to your lender.
You should get better than market rent and better than market price on a L/O.
Only the part above market rent should go towards a rent credit. Not because of any legalities, but because it is taking money out of your pocket.
Essentially you are giving them rent at $350 a month. Why would you do that? this does not even cover your underlying loan payment.
At some level the seller is showing a fundamental lack of understanding in the time value of money and how to price property for sale 10 years forward.
The deal is not good or bad as it is not clear what you want to accomplish. As a buyer I would definitely consider it as good to me. It might be good for you as a seller but that would be for non-economic reasons. I say that because you are clearly not pricing the deal as well as you could (money left on the table).
What are you really trying to accomplish by doing such a deal?
John
[addsig]
So I should reduce the option period and the monthly credit. I do understand the time value, just wasn't using that perspective due to the probable payoff within the year. So by structuring it with less monthly credit and a shorter period I would be better off in case of no early payoff correct?? The reason for the lower asking price is just because I am willing to leave a little bit on the table to secure a faster sale. There are three comparables within a block of mine asking for between 73k-78k and have not sold in 8 weeks. I don't want to sit on the market like they are.
Thanks
scott
OK, they have not sold in 8 weeks, but are they pending? Even if you get a contract on the first day it takes about 6-8 weeks to close.
Get your realtor to pull comparables that have sold and see the days on the market
Rule of thumb, which may be different in yoru area - L/O are for about a 2 year period, they are above market price, they are above market rent, and you get a non-refundable option fee of 2-5%.
Brenda
Scott- This can be a great deal for you and legal if structured properly. Your option pymt is fine. You need to charge more than a normal lease for the area. If other rents are $700. , I would be at $800. for a L/O. Credit $50. for on time pymts toward purchase price and set the purchase price no lower than 70k. Also, use a 36 month option tops. Good luck.
OK I took alot of the advice on this and went back to them with a counteroffer. They walked. I don't mind though since it appeared like a semi-bad deal. I got another offer today on a l/o however. This one is better and we did negotiate before reaching at least a tentative verbal agreement. Basically next week we will sign the papers. The deal is this:
Purchase Price $70k
Option Consideration $5k
Monthly Rent $600
Monthly Credit to princ. $125
Option term is 5 years.
I know I didn't get everything you guys said for me to get but I feel like this is a big gain for me considering what I almost gave up. Please grade this deal. Feel free to critique as it is my first deal and I have never bird-dogged or anything. I believe if I did my math correctly she will still owe me 57.5k at the end of the five years, and my mortgage will be paid down to 37k. So that shows a profit of $20k doesn't it???
Heck I just bought it on April 9 for no down at 49k and put $5500 in repairs.
Scott
I would only give $50 in rent credit. You said that market rent it $550.
Also, I would give a two year L/O. If at the end of the two years they could renew - if they were adhereing to all the terms of the lease - for another 2 years, however the purchase price would increase by 5%.
Brenda