Re: Bank won’t consider option $ as down payment! - Posted by JohnBoy
Posted by JohnBoy on June 03, 2000 at 21:15:35:
The option money and rent credits are NOT used as down payment money. They simply reduce the option price of the property “IF” the option is exercised.
The option consideration, which should be stated as “NON-REFUNDABLE OPTION CONSIDERATION” is for the seller taking the property off the market and tying it up for a pre-determined amount of time. As a result of the seller doing this, the property could increase in value before the option period expires costing the seller a loss in future appreciation. This also ties up the property where the seller could not sell it to another buyer while an option exists on the property unless the new buyer would except the terms of the option. Not to many buyers that I know of would want to offer more for a home and agree to the terms of an option price that may be lower than their offer. Anyway, shouldn’t a seller be entitled to get paid some money for doing this for a potential buyer and taking on the risk of the tenant paying on time and caring for the property while they occupy it?
The rent credit should NOT be listed as down payment money either. That credit is deducted from the purchase price “IF” and ONLY IF, the tenant exercises the option. Otherwise that credit is forfeited, period!
Now imagine if the tenant decided they no longer were interested in exercising their option for whatever reason and the option consideration and rent credits were shown as down payment money? The tenant may decide that since the money was shown as them paying this towards the down payment and that they no longer want to buy the property, they may claim they’re entitled to a refund of all the down payment amounts since they won’t be buying the house. Do see where this could become a problem later especially if the tenant got an attorney and went to court over this?? You don’t want to get involved with that kind of problem.
The way this should work with the lender is that “IF” and when the tenant should decide to exercise the option, the loan should be treated as a refinance vs. a new purchase. The option consideration and rent credits would be credited against the option price. This will allow the LTV (loan to value) the lender loans against the purchase price to be in a better position leaving some equity left in the property to better secure the lenders note.
Ask your lender and lawyer how they loan on someone wanting to refinance a property that was purchased on a “Contract for Deed”? A L/O should be treated pretty much the same way. If the buyers lender doesn’t understand this or they won’t agree to this, FIND ANOTHER LENDER! If the tenant can show rent payments on time for the two years and keep his credit clean and work on cleaning up any prior credit problems he may have, then getting refinanced later to exercise the option should not be a problem at all.