Rent Credits Toward The Purchase Price??
Hello investors,
I am in the process of doing my first L/O, and I am negotiating with the other party the amount of rent credits that will go toward the purchase price. What I am a little unknowledgeable about is, how do the rent credit actually apply to the purchase price? When it's time to get a loan, do they apply towards that, or do they apply when we are at the closing table. I am a little confused on how will this work.
Here's the scenerio, $1000 option deposit, $250 a mo. rent credits, with a 24 mo. lease term, will equal $7000. Now what will this money be used for and does it come out of the seller's pocket since he is receiving the funds? Will it help obtain financing easier?
Someone please help me with this, your response will be greatly appreciated. Thanks and have a nice day. :-?
Ok, first of all $250/mo after 24 months is $6,000, right?!?
When the seller decides to exercise his/her option to purchase - that money can be used to go towards the purchase price, closing costs, etc. It all depends on how the contract is written up. I would put it towards the purchase price, personally.
I would not recommend putting it towards the down payment, however, because this will give the tenant/buyer an "interest" in the property and if you need to evict - you may find yourself having to foreclose...
Anyway, this is my opinion... Anybody else have an opinion?!?
Good Luck!
[addsig]
Here is how I would do it.
I am assuming that your option agreement stipulates that monthly rent credits and the option consideration will be applied to the purchase price. Furthermore, I am assuming that your option agreement specifies the contract sale price before any credits are applied.
Now, when the tenant-buyer tells you that he is exercising his option, write up a sales agreement for the contract amount minus all credits to be applied. For example, if your option price is $125K and the buyer has accrued all 24 of his monthly rent credits, then the $6K rent credits and the $1K option consideration reduce your sale price to $118K. Write up a sale agreement for $118K.
The buyer now goes to his lender for whatever financing he can get on the property at the $118K purchase price.
Thanks for the reply NewKidinTown. Your advice has been very informative. I will deduct the rent credits & option deposit from the purchase price. 8-)
Good advice, but what if their credit is bad? And they will have to come up with a large down payment as if they were starting from scratch. Since you only received a grand as down, it won't be a problem. But what if they had paid you several thousand? They will want that to apply towards a down payment. I don't use a separate Sales Contract. I deal with lenders who consider it a refi, and my Buyers simply exercise their Option at closing. This way, it's based upon the appraised value--the other way, it's based upon sales price. I'm in this business to help others, and I want my Optionees to buy.
But I always apply rental credit towards the purchase price. I just apply Option Consideration as a down payment for those who decide to go conventional.
LeaseOptionKing's statements simplified:
There is no formal, separate purchase agreement. When the tenant/buyer is ready to exercise their option, they (and you) go to the lender with a copy of the lease and option agreements. Once there, you and the T/B can show the lender the agreement, along with copies/cancelled stubs of the option payment and rents. Using your example, that would add up to $7K off of the original option purchase price (for example $100K), so the t/b would need $93K plus closing costs in order to finance it.
What LeaseOptionKing is getting at is that several lenders will consider a L/O as a refinance, so they will go off of an appraised value, tax value, etc. Sometimes, though, the lender may want to do it as a straight purchase, so you will need to fill out a purchase contract. It will really depend on the lender and how your contracts were written.
If the lender wants a purchase contract, the simplest way to write one up is to list the original option purchase price and then deduct the total option/rent credits as a downpayment. This way, it will give the t/b a larger "downpayment" in the eyes of the lender, so the t/b will not have to come up with a lot more, if any, money out of their pocket.
Roger
Sorry, I can sometimes be confusing. I have Mercury in Capricorn if that makes any sense (for any astrology buffs). Mercury rules communication, and so I tend to be straight-to-the-point and can appear cold at times. I must say, rajwarrior explained it very well. [ Edited by LeaseOptionKing on Date 08/10/2004 ]