portion of rent payments applied to purchase price?
I am working on what could potentially be my first l/o deal and am unclear on something... In the l/o contract it states that a portion of each rent payment shall be applied to the purchase price of the property... how do I determine what portion of the payment will be applied to the purchase price? Is it the equity portion of the existing seller's mortgage payment?
Thanks!
this is how I learned how an L/O may work....
if mortg payment is $1000 a month:
option 1. renters pay $1000 and no rental credit applied.
option 2. renters pay $1100 and $150 is applied to rental credit.
option 3. renters pay $1200 and $400 is applied to rental credit.
then after a couple of years they will have
XX amount of $ that can be applied.
Verne
I thought you would just take that money and deduct it from the selling price you agreed to sell them the house for.
That is how I am doing it.
Rent is 650.00 and 130.00 each month will be applied to purchase price.
So on a say 12 month L/O 130.00 x 12 = 1560.00 off the selling price of 75K, they would then owe 75K - 1560.00 = 73,440.00.
Now I have that 130.00 a month to do with as I please.
well there are others ways to do it.
the example I was using, what you're supposed to do is get 2 appraisals after 2 years (or whenever the L/O expires) and get the average price of the 2.
the "credit" they have accumulated will be applied toward the price.
Verne
Thanks, Verne and davese. I'm still a little bit in the dark. In Verne's example, he gives the renter $150/mo. toward the purchase price if the mortgage payment is increased to $1100 from $1000. Where does the $50 come from? Does this come from viewing the mortgage schedule so that you know the equity portion of the $1000 payment is $50, or is it an arbitrary figure that you just offer to the renter? Also, do you have some type of formula for determining the selling price of the house at the end of the option term? Obviously, I'm very inexperienced at this. Would anyone be interested in mentoring me through my first deal for a % of the profit (if, in fact, this potential seller signs the option). Thanks.
Purchase Price
Assuming the terms of the sale AND the purchase price would be agreed to at the time of the L/O agreement ? Ex. You agree on the deposit, credit towards purchase per month AND the sales price (allowing for a fair avg appreciation 5-6%) with a 1 yr. contract.
Does this work vs going off 2 appraisals since the Buyer then doesn't know his purchase price until the back end ?
[addsig]
okay guys. let me try to clear up the confusion here. I think you may be making it a little more difficult than it needs to be.
first example: rent = $1000 no credit towards purchase
rent = $1100 with $150 going toward purchase.
The "$150" figure is nothing set in stone. that is a figure you come up with, based on what you are trying to accomplish. so what this means is, if you and the TB agree on a future sales price (based on the growth in your area; will get to that in a minute), then the $150 monthly credit will come off of that purchase price. All of this should be very clear to all parties involved and it should be part of the contract. in other words, lay it all out on the table (and on paper) for the TB so that they can see what they are buying into. here's an example:
you currently have a property that is worth 100K. based on your research, the projected value growth over the next year for your area is 7%. so one year from now you will have a property that is projected to be worth 107K.
you and the TB agree that he/she/they can purchase the property, based on your research, for 105K. right there you have shown the TB that they are getting a 2K break. with me so far?
okay. the TB also agrees to give you 5K earnest money, which now knocks his price down to 100K (this money should be applied to the purchase price.) so again, you are showing the TB how their money is working for them.
you also agree that $150 a month (from their rent to you) will be applied to the purchase price. at the end of that year, that is another $1800 off the purchase price, so now we are down to 98.2K. more than likely the property you have will or should have a payoff less than the 98.2K so that you can also make some back end profit. so what you have done during the contract discussion is show the TB how they are "saving" money to purchase the home. if, after one year, they don't exercise the option and you have no extensions in place, you start the process all over (the earnest money, by the way is non-refundable).
now on to the future sales price. you will have to do some research here with agents or maybe your city/county's property information system to see what the projected growth is. I am lucky in that an agent in my area keeps me abreast of this. for example, housing values soared 12% last year and is projected to be 7% next year.
I hope this helps. let me know if you have any other questions.
vac
The difference between the reasonable lease payment and what you have to pay the seller is your montly profit and you're not obligated to give any rent credits.
When you encourage the tenant/buyer to pay extra each month to get rent credits, the additional arbitrary amount of credit you give is to motivate them. I offer the buyer twice what ever extra they can pay above the reasonable rent rate as credit toward the purchase price to motivate them. The extra rent is essentially giving up some of your profit on the back end to get more monthly profit.
<<if, after one year, they don't exercise the option and you have no extensions in place, you start the process all over (the earnest money, by the way is non-refundable). >>
I've just started looking into this and my questions is, if they don't excercise the option, what happens the part of the monthly rent that was a "credit" to the purchase price? Would they now own equity in my property?
Thanks for helping a newbie out!
Bob
Hi - thought I'd chime in on this -
I noticed one thing in this thread....no one ever brought up the possibility of getting FULL rent credit from the seller. All it takes is to jsut throw it in if the seller balks then start discussing but start from the TOP not the other way around.
Also, froma another angle - and depending on what you plan on doing, you can IMHO (or rather you SHOULD) - especially if you plan to buy the house - have stated in the Option that all payments accrued (ie your rent credit) until date option is exercised will count as a deposit on the final purchase price. Why? because if the need arises for you to go via the conventional lending route you can declare that you put 20 30 or whatever % of your money into the deal. Banks love that.
I'd better expand on the above - that would only be valid if you intended to buy the house yourself - all the same the conventional ruote should be an ABSOLUTE LAST resort (in fact I'd probably flip it unless I wanted (read WIFE) to live there myself. If on the other hand you plan on sitting in the middle and selling it to you t/b'er then you should be ok - in fact to make sure you are take the t/b'er to YOUR mortgage banker and check what needs to be done to get them to buy that house when the time comes to exercise.
If you start taking loans out in your name you won't be going far.
Cheers.
J.[ Edited by JohnC on Date 06/29/2003 ]
Hello all, I have a situation that may come into play with this discussion. I have a property free and clear ( inherited ) it has been empty for about 14 months. Valued at about 90-92k, struggling with the decission of what would be the best way to make the most money from this place?
I have a chance to lease purchase and wondered from you experience would this be best or should I owner finance.
Thanks
Phil
Quote:In the l/o contract it states that a portion of each rent payment shall be applied to the purchase price of the property... how do I determine what portion of the payment will be applied to the purchase price? Is it the equity portion of the existing seller's mortgage payment? Denise,
Let's say that the current appraisal of the property is $100K. Let's say that two years from now, you expect the property to appraise for $120K.
The idea behind the lease purchase arrangement is to "sell" the house today at tomorrow's appraised value. You let your tenant rent for awhile on a try-before-you-buy plan. Your rent should (at a minimum) be a fair market rent. If you get anything over that, then consider giving some of it back as a rent credit.
When your tenant purchases the property, the agreed price is reduced by the amount of option consideration you collected up front, and the total rent "credits" you gave during the lease term. The rent credits just reduce your profit, so they are really coming out of your equity.
In a thin deal like this one, I probably would not offer any rent credits. If my selling price were $135K, I might consider giving a $250 rent credit toward the purchase price. Set your selling price at $165K, what's to keep you from offering a rent credit of 75% or even 100%?
one other thing that I have heard is that if you give a credit with a l/o that you would have to foreclose on them (if they stop paying) versus just evicting. This is due to them building equity, where when you just lease (without any equity) it is just that - a lease.
Thanks, everyone. You have all been very helpful and I am beginning to get a clear grasp on the concept. It seems that the whole thing is about motivating the buyer to pay more on an on-going basis and not worry too much about the back end profit.
This is what I always do:
Know what sales price and interest rate YOU will set.
I run a 30year ammortization chart on the Property and ....VOILA!!!!
....as always,
GoodInvesting, Rocky
hey nobody answered an interesting questions I saw in here:
WHAT HAPPENS WHEN YOUR T/B DOES NOT EXERCISE HIS OPTION - ALREADY KNOW THEY DON'T GET BACK THE DOWN PAYMENT - BUT WHAT ABOUT THE PORTION OF THEIR RENT THAT WAS SUPPOSED TO GO TOWARDS THEIR FUTURE PURCHASE? dO YOU HAVE TO GIVE IT BACK OR DO YOU GET TO KEEP THAT TOO?
Before I started doing Subject to I read as much as possible, and one of the books I read was about L/O.
The author suggested that to encourage prompt payment of the lease, you should send them a voucher for $ 25 or $ 50 worth of credit towards the purchase price, every time they did pay before or on the due pay date. However, IF any payment would come in late, all vouchers would become null and void.
Ladybig