Need L/O Advice
I have 9 rentals scattered across the country and have primarily a buy/hold strategy. However, I bought a property in Buffalo that I have renovated. My property management team is really reluctant to rent it because it is now so beautiful (new roof, new kitchen, new carpet, etc.) So, for the heck of it, I put a "Rent to Own" ad in the paper and now have a potential L/O working. Since I have never done a L/O, I would like some guidance.
1) The prospective buyer got burned pretty bad on a previous L/O. She paid the mortgage and the owner walked away with the money and foreclosed on the house. Any ideas on how I might better secure her investment? I can't file the deed because I will still owe on the house and the bank won't let me do that. Any ideas?
2) So, do I lock in the interest rate AND the purchase price at this time? My interest on the house is 6.5%. I obviously would give her a higher rate. Any thoughts on how much higher? Should I run a credit report and do it based on her FICO?
3) She wants to move in right away. Do I risk the deal if I let her move in on a rent agreement while we work through the L/O or should I only let her move in once we have sealed the complete deal? (she is also talking to a bank about getting financed)
4) The rent would have been $800 -- my mortgage (including ins. & taxes) is $250. If she doesn't have any money down, should I say the rent is $800 and the X$ (difference between her mortgage and rent) difference will go towards her down payment?
5) I have seen some of you talk about making the L/O a limited time. Some of you say only 12 months and some said you did 36 months and regretted it. Why?
6) What happens if she purchases and then stops paying? In Buffalo it is easy to get renters evicted but how difficult is it to get an owner evicted? Do I have to go to foreclosure court?
7) Finally, I like the idea of her taking care of all her maintenance but on the other hand, I don't want her to let the place get run down during the L/O period and then decide not to buy and leave it a mess. Thoughts on this? I would LOVE a maintenance free, cash flowing deal but is it too risky? Should I maintain it until the L/O goes into effect?
8) I have read a few postings where people suggest a balloon payment. Since I am not getting any younger, I like this idea. What are typically the terms, i.e., X$ per month, no early pay penalty, and remaining balance due in 17 years ... or something like this? I would really like to get this as a 15 year loan or something like that.
Thanks in advance for all your help.
lavonc,
I am no expert but I have done several L/O deals and also have done an owner financed deal. I could be wrong but it seems as if you're intermingling a L/O with owner financing.
In an L/O you are leasing the property while giving the tenant/buyer the option to purchase the property at a predetermined price during or by the end of the L/O. She is responsible to secure her own loan for the purchase.
I don't know the particulars of her previous L/O that burned her but if you have a good L/O contract and both parties perform their obligations per the agreement there should be no problems.
It also sounds as if she is making effforts to finance the property in short order. The length of the agreement is up to you and her. You may offer her a one year lease option in order for her to secure her financing. If she is willing to pay $800.00 per month as a lease payment you may elect to give her a portion of the difference between the $800.00 and your $250.00 mortgage payment as a rent credit that would go toward the downpayment when sh exercises the option to purchase.
Is there a particular reason you are not requiring a lease option consideration up front?
Dave
[addsig]
Thanks Dave for your reply. I realize my post was fairly lengthy so I was beginning to think no one would reply.
You are right. I am intermingling a L/O with owner financing, which I was considering but now that I read your reply I think I am going to reconsider.
I like your idea of accepting a 12 mth L/O of $800 with $X going towards the down payment (I think she has some money to put down as well). Then at the end of the 12 months, she gets her own financing and we close the deal.
What happens if she can't close financing at that time but wants to stay in the house? Do I do another L/O with her?
To answer your question, no, there is no reason to not do a lease option up front.
Oh, one more question, is there any difference between "Rent to Own" and Lease Option?
Thanks for your help, LaVon
LaVon,
If she doesn't secure financing by the end of the term then the lease is over and she moves out unless you wish to sign a new agreement. I think your willingness to enter into another agreement with her would depend on the circumstances and reasoning as to why she was unable to secure a loan. I am not an advocate of putting verbage in my lease option contracts that allow the tenant buyer an extension of the term.
As for "rent to own" and "lease with option to buy" they are one in the same to me. It is an agreement that allows the tenant buyer to purchase the property within a specific time frame at a predetermined set purchase price. Good Luck.
Dave
[addsig]
Yes, a Lease Option and a Rent to Own offer are the same thing. In the contract that I use, we spell out everything to the dollar. I have an investor that actually let the buyer pick the home that they want. The tenant pays all of the costs upfront, paying 6-7% for the down payment. The rent is around 1% of the purchase price, which covers taxes, mortgage and insurance. At the end of the 1 or 2 year term, the tenant should have gotten their credit straight so that they can finance on their own. At that time, the tenant actually "buys back" the home, with the home's original price, plus 5% for appreciation of the home. The investor gives them back the 6-7% that they put down back to the tenant to use for closing costs or down paymen purposes. They are responsible for their own repairs, and we have a special eviction clause included as well to avoid a mess if the tenant fails to pay. If the tenant is late too many times, you can also forfeit the 6-7% downpayment. The tight constraints of the contract makes the tenant do what they are supposed to do...improve their credit, pay the rent on time, buy your home, and make you money. If they do follow they lose their money! You may want to follow some of these ideas, or do this type of L/O program in the future. If you have some questions, feel free to ask me!