Question About Option Money.
I understand that option money goes towards the purchase of the home. Is their a range that a seller can ask for as option money? Since the option money is non refundable, $10k would probably be a lot to ask for as option money, or would it? What amount can I ask for that would be fair to both parties? Thanks in advance.
Ask what the market will bear!! I don't think $10,000 is too much. Tell us a little more about the property though.
Just purchased a 2/2 with den for $95k. This is about appraisal value. Homes in the area are renting for $800-$900. Need $1100 a month to hit my cash flow goal of $200. This is why I want to L/O the property. The house is only 11 years old and freshly painted with carpet and the yard is very clean and large. Basically, the house is very, very nice.
What I would like to do is ask for the $10k down and then charge an extra $200 a month to go towards the rest of the down. Give 3 years to exercise the option which would give a total of $17,200 as a down payment after 3 years. Homes in the area are rocketing up so I would like to sell at $125k -$130k.
Does this sound realistic? Is $10k too much to ask for as non-refundable option money? What other options could you suggest? Thanks again.
Sounds great. Yes, ten grand is realistic. Normally I shy away from 2 beds, but in HI it may be a good move. You know your market there and what it will bare. (hey, that rhymes!)
Anyway, I'd pay ten grand to live in HI!
good luck!
Steena
Let's add a little dose of reality here, okay? You're asking a buyer to give you 10% of FMV for the OPPORTUNITY to buy this place at some point in the future. While it may work in your area, the best question to ask yourself is, "would you pay it?" Be objective in your answer. I know I wouldn't.
If I had 10%, I would have to have some terrible, terrible credit not to get some financing somewhere. Ask your mortgage broker for their opinion here. Now if you're looking for the really crappy credit people, it may be possible, but again, IF they had that kinda money, they probably would have paid their bills, and not have crappy credit.
I think you were right questioning the amount. You've got to know what your market area will bear. Most L/O's typically get 1-3% down for an option. I've seen 5% but it's likely to sit awhile. Again, your area may be different.
As for the rent, will it bring $1K a month? Again, it's a market thing. As for the $200/month credit, make sure that you'll still be in the position to sell IF they do exercise their option. At that amount, it's likely that you'll be giving more per month than you're paying on the loan's principle.
Roger
I ask for 3% down and a rent 20% higher than normal with the difference being applied to the downpayment as well. 10k is a bit high in my books.
I agree that 10% is a bit much. On 95K you can probably get 3K consideration.
Do the rent credits however you like, just work the numbers to make sure you don't go negative.
If the Consideration is going to the purchase price then the purchase price should reflect the future value of the home.
I ran across an interesting L/O just yesterday. Rent was $1400 with the OPTION of paying up to $200 per month more that would be put toward down payment. At the end of a negotiated time period (one or two years, she said), she would MATCH the option money. $1400 per month in just rent was definitely stretching the fair-market rent for that type of home, but homes are skyrocketing (double digits for the last 5 years). Combine that with the matching option money, and someone could have themselves quite a good deal. The option money was the same as the first/last/deposit combined ($4000.00) The sale price of the house was $249k.
[addsig]
Thank you all for the wonderful advice. Rajwarrior, you bring up some very legitimate points. Telemon posted some very good stats that I can certainly use. Shirley, would like to find out how that deal worked out. If anyone has any ideas on how to better structure my deal, I am all ears. The rental market is very strong in my area but I don't know about renting a 2/2 for a thousand. My first rental was a 2/1 for $725. 14 calls the first day. The thing that I'm dealing with in this deal is that I made a down payment loan. I pay $144 for that loan on top of my PITI of $779. Without that loan, I could easily rent for $900 very quickly. This is why I figured lease/option is the way to go. So if anyone has any idea how this deal can be worked, I'd greatly appreciate it.[ Edited by cmyke on Date 12/30/2003 ]
Ten thousand is not very realistic even in Hawaii. With that downstroke they would buy. Credit could be corrected or diverted as they say. Remember Lease with Option is really effective when you have a spread between what you are paying and what is the Market Value of that property at the end of Lease. If the spread is good you do not have to fear of going upside down. Which I have done on occasion and justified by utilizing the money to buy another property. But it is really risky.
Forgive me, I hate to be the second rider on your Chariot wispering in your ear not to listen to the applause and the roars of a market just past. Telling you it will go on and on.
I know call me Cassandra, but the leaves on the trees are rustling, the faint smell of snow is in the air. The top listings are draging and their listing times have had to be extended.
I think now is a time to sharpen your downmarket skills. Just as much fun and just as profitable, but a different direction.
An Investor in Real Estate must gird his waist with more then the sword whose broad strokes are applicable to the advancing market. He must also carry the small double edged dagger narrowed at the point. This is used for the down market and that period of trembling as the change occurs.
This 29th day of Dec. brought me another call from an REO officer, his request is help on a large residence that his bank got suckered in on led astray by an appraiser who made a quick $5,000 for an opinion that swathed the property in cloth of gold. The bank stampeded into a loan the likes of which I have not seen since we burned witches for kindling back in Old Salem Town. I go tomorrow to visit the PIQ, you like that one. Property In Question. Now that is exciting. I'll keep you all abreast.
Anticipating Lucius
One quick way to find out what the 2/2's are going for is to look in your local paper or RE book to compare prices. This should give you a great idea of exactly what the market is paying currently. This will at lease give you a feel for your price, rent, and down payment.
I also feel 10% is a lettle steep. In many cases a straight purchase only asks 5% down.
Good luck
I agree with the others that 1-5% is yur range for option consideration.
The ideal here is to make a deal, put some money in your pocket, create an income stream and then eventually sell.
If you ask too much up front, it may scare the buyer away.
T/B want to know 2 things - down payment and monthly payment, the purchase price is not THAT important to them. Can they afford it now - basically. So I always feel them out and indicate that the amount required down varies depending on their credit (this gets them to tell you about their credit) and what they wish to make in monthly payments. Ahead of time, I figure out an estimated down payment (NROC) range and apply corresponding monthly payments. I still cash flow with the lowest monthly payment. If I had a $10,000 NROC I would probably allow for near or close to break even on monthly payment. If they put that much down they are very vested and have a higher probability of truly exercising their option to purchase, at which time you get the BIG payday. But if they are weak on the down then you HAVE to cash flow. I would never accept below $3,000 on a $100k home. My nroc/payment range might be 3000/1250, 4000/1150, 5000/1100, 7500/1000, and 10000/950. First before you go into range talks, feel them out for what they may have available prefacing that the more they put down the lower their payment. Good Luck.
I don't know a thing these other guru's do. I lease optioned 2 houses since December 23rd. The 1st was 10k down on a 100k fmv house and the 2nd was 5k down on a 105k fmv house. Rent on the 1st is 650 per month my mortgage payment is 540. The second rent is 950 and my mortgage payment is 850.
The second guy paid 6 months rent in advance to have his name put at the top of my list. Price to tenant buyer is 112,500k on the 1st and 122,900 on the 2nd.
Paul
I also am having bad luck on a 3rd deal I haven't found a tenent buyer since the house became vacant on December 26. Boo Hoo.
cmyke,
Unless there has been some legislation to change this, option consideration does not necessarily go toward the purchase of the property. The option consideration is just consideration for the right to buy in the future. I have seen option agreements where option consideration does not necessarily apply to the purchase. Perhaps someone can update if there has been change.
Regards,
Ed
Dear Ed,
It flies either way it is up to the moment of bargain. Some are just that an option, you pay you are entitled to buy. The other is an option and applies onto the purchase price of the property. Both must be spelled out. Just a matter of good contract.
I have a small problem on my hand. I am afraid to give an option of purchase as my costs (paper) are not fully www.finalized.The man wants this house erected on his still hot lot (small fire a bit ago). I have given him my word, but because I am a Licensed Realtor and he spells that Realtor real funny. He does not believe my word. So I wrote him a letter. In the letter I gave him my personal promise and so as not to over charge him I will expose all costings to him. He has accepted the letter and promised to pronounce and spell Realtor correctly,
Playing Contractor right now. Lucius
Thanks, Lucius
I was reasonably sure that option consideration is not forced to reduce down payment or purchase price by nature, that it, is consideration given by optionee for the contract (option).
By the way, Happy New Year and warm regards,
Ed