Re: cashout refi on lease option - Posted by Ed Garcia
Posted by Ed Garcia on February 28, 2002 at 24:43:30:
Linda,
The first thing I would like to do is give you a couple of tip on lease/options.
Lease Option Preventive Maintenance??
Lease Options are far and few between for me. I don’t normally deal with them, but I’m writing this for the benefit for those of you who do.
Usually we lease option to a buyer because they’re not financable. That may not be true in every case, but it’s more true than not. Remember for the benefit of this post, I’m talking about the rule, not the exception to the rule. With that in mind, you have to ask yourself a question. When the lease comes due, will the buyer be able to perform?
For those of you who have the roll the dice mentality and say, I’m not worried about it. Don’t waste your time reading the rest of this post, because I’m just wasting your time.
This post is written as a reminder of what your intentions are when you wrote the 2 year lease to begin with and how to make sure the deal goes as intended. What I don’t want you to do is to ASSUME that just because you have written it for 2 years that it’s automatic, because it’s not. Choosing the buyer and policing the buyer is the key.
When choosing a buyer I would have them checked out or be pre-qualified at a mortgage company of my choice. Now in doing this, you have just gotten a FREE credit report on your potential buyer. Who knows, your buyer may be qualified for a loan NOW and not even know it. I can’t tell you how many times a customer has told me that they have bad credit only to find that it was old bad credit and they were financable. What ever the outcome, you now not only know what their credit status is, but the broker can tell you what steps or what has to be cleaned up, in order for them to be financable in the 2 years.
So now, rather than HOPE that in 2 years the buyer is financable, you’re PLANNING for it. It also gives the potential buyer an incentive, because now they know what it will take to close the deal in 2 years and no longer have to wonder and hope if it’s going to happen.
The reason I picked 2 years. Is because the lending community is forgiving. Almost any borrower who is in trouble, can clean up their credit in 2 years. The one last thing I’d like to add to this post is to give you a web-site that you can visit to help your potential buyer clean up their credit. That site is http://www.creditinfocenter.com/ In visiting this web-site you will find instruction on how to clean up their credit, along with a Credit Rapair Kit, with generic letters to send to the credit beau and much, much, more.
If your broker tells you that they don’t see the buyer to be financable in 2 years because they will not be able to afford the payment of a mortgage versus a market rents. Then again, you know this going in.
Secondly when you say “Can I get an equity loan when I have a hard money loan? I’d hate to pay $2500 in closing costs on a 48,000 loan”.
Linda, a Hard Money Loan is an equity loan. Also, loan costs are negotiable. However because of section 32, many lenders don’t even want loans under $50,000.
My suggestion is for you to find a mortgage broker to work with, who will help you structure your financing for future deals. Personally I would not make selling on a lease/option a practice. It will bottle neck your financing. You’ll feel like you sold the property but in reality, a lease/option is a nothing more than a glorified rental agreement until the option is exercised.
I hope that this post has been helpful to you,
Ed Garcia