Rent Credit Question.
How do you determine what the exact amount owing is at the time of purchase for a tenant/buyer?
I'll give an example.
Assuming you buy a house for 220. Now you find a tenant/buyer and the prices for a similar house are 250K. You would then determine the future price of the house by adding 5%...and then another 5% for the 2nd year in a 2yr lease.
this would mean the house is going to be valued around 275 after the 2 yrs are up. You would then agree to a price under that in order to sell it correct? say 259K. Subtract your down payment you received(10K) at signing and the remaining balance is 249K.
Now for the 2 years you have gotten an extra $200 rent credit in addition to the rent. For example, if the tenant/buyer gives you $200 extra/month do you have to give him $400 in rent credit(200 from him and 200 from you) or is it just $200?
In this case it would be $4800 off the purchase price with the rent credit or $9600?
ANy help would be appreciated. thanks in advace and sorry for the long post!![ Edited by dare2003 on Date 10/28/2003 ]
The attractiveness of the lease/option from the perspective of the investor (you) is the ability to generate above market rent during the period of the leasehold (in your example, 2 years). During that time the tenant/buyer is building equity (represented by the rent credit plus appreciation). From the perspective of the tenant/buyer there are 2 benefits: 1) they are locking in the price of a property in today's dollars that will appreciate over the time of the leasehold so that when the option is exercised they will have equity to the tune of the difference between the option price (which is determined at the commencement of the leasehold) and the appreciated price (after year 2); 2) they are putting away a certain amount per month towads the down payment. In the event that the option isn't exercised, the option consideration or reserve money ($200 extra per money) is forfeited.
Let m eget this straight...When you actually sell a house using a lease option you are selling a house that has equity in it already/ Why would you do that?
I think the object is to NOT sell it and find a new tenant/buyer and receive another down payment...non-refundable of course
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Im just trying to crunch some numbers but id like to hear some advice from the pro's before i jump in.
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Any help would be appreciated guys!
I've seen stats that only about 10% of the buyers ever excersise the option to purchase. When figuring an option price, calculate the maximum rent credits, plus your profit. Figure in your mortgage or such and make sure you don't go below this price for the option.
It doesn't matter if your mortgage payment is $600 and your lease is $700 but with a rent credit of $200. If your tenant doesn't buy you keep the money (you're good). If your tenant does excersie the option that is fine because you have your profit built into the option price!
Hope this helps. GOOD LUCK
It's a numbers game. what is essence you are doing is suppliing them with a sizable down payment in the future on a house that your already have set a price on. The credit you are giving them is coming out of thin air. You are just giving them a way to show a sizable enough down payment to obtain a mortgage. I personally want the sale to go through, because then YOU are the one walking away with a check for the difference in equity between the price you negoiated and the price they paid for sittng back and collecting the difference in monthly checks.
If you are giving a credit make sure you adjust the price upfront to cover it, so it doesn't eat away at your profit. Any additional money the give you each month is just an advance on what you are making on the back-end. Just make sure you have a non-refundable or forfeiture clause in your agreement in case they don't exercise. Then the money is yours!
Quote:
On 2003-10-28 18:14, chantynicole wrote:
Let m eget this straight...When you actually sell a house using a lease option you are selling a house that has equity in it already/ Why would you do that?
The better question is why wouldn't you. As with everything you try to sell, the greater the value proposition for the end buyer, the easier the sell.
Your goal here is to lock in a certain profit level for yourself and find a tenant-buyer to care for the property like it was their own. Freeing you of management headaches. If you take away all future appreciation you will be just a landlord, get market rates and not receive an option consideration.
Or in other words, try to sell this to someone. Hey buddy, If you give me $10,000, I'll let you rent my house for $200/month more than you could rent the house next door. How about it?
Hey! Thanks for the response. So much more sense said that way!
~Chantelle