I’m not an expert on L/O either, but I do see two things:
You would want to sell the house at the FMV of the future date, not today’s prices. In any case, you can charge a little more than FMV because it is a L/O - you’re helping someone out here.
You do not need to “save” the $500/month. You do need to show that you are “crediting” that amount at closing (that means that, if you sell the house for $165K, you can show that they have a “credit” with you for $12K, so the amount you would be receiving from their bank at the time of close would be $165 - $12 = $153. It all comes out at the end - you don’t walk into closing with a $12K check; you walk out with $12K less.
The buyer’s bank will not consider FMV - they will consider purchase price, so the “down payment” will be on the sale price of the home. If you sell for $165K, they would show 7% down (12/165 = .07)
One reason you could do this is to get the house sold and be able to move quickly. You also would collect a non-refundable “option consideration” at the beginning of the L/O (on that price house, I would say a minimum of $5-10K). If your “tenant/buyers” do not close, you get the house back - and get to keep all of the option consideration and you can now try to do it again-for more money, of course, because the house will have appreciated. Also, you really should be collecting “rents” a little above market (because you are crediting a portion, and because you are helping someone out), and definitely enought to cover all your costs. The spread between your costs and your rent would be another reason to do this.
I’m sure there are many ways to make sure that all of this is documented and done right, and I’ll wait for the pros to get to the nitty gritty!
I know most of you are very smart and I am new at this, so I’m posting this knowing that it will probably sound really dumb.
Here is my scenario:
I want to move. My house would probably bring 150K if I wanted to stay and sell it. There are a lot of houses for sale here and new ones being built every day. However, I have been thinking about L/O. I?m not sure how it would work? I have a 1st mort for 122K and a second for 25K. Payments on the first, (including Taxes & ins of $300/mt) is $1200 and payments on the 2nd, (15 yr note) is $300/mt. In this area rent of $1500 is not too far out of line.
If I did a L/O for 2 yrs, sold it for 150K, at $1500/mt and put 1/3 toward the down payment, ($500/mt), after 2 yrs would be $12K. After 2 yrs, the FMV would be approx. 160K to 165K. 150 - 12 = 138 138/165 = 83% Who ever was leasing would have 17% for his downpmt. Is this correct?
Also, this means I would have to save his $500/mt.
Where would I get the other $500/mt to make up the rest of the mort payment?
And why would I do this???
I really think I?m missing something here. I?m lost. Any ideas out there???
Paul
$160 lease option price
$5-10K down (how ever much they have! but no less than
5k cash, preferably no less than 8K…the
more you get, the safer you are)
NO RENT CREDIT…just because they ask doesn’t mean you have to give it to them! Especially when there is no room in it.
Whatever the market will bear in “rent” + a couple hundred…be flexible. If they want it, they will counter offer, unless they are stupid.
Place a “motivated seller/lease option” ad—they will come out of the woodwork…you’ll see. Keep a log. Sell your remaining leads to a local investor.
Re: L/O am I missing something? - Posted by Stacy (AZ)
Posted by Stacy (AZ) on April 29, 1999 at 09:20:34:
Just a quick reply…
You should sell for more than FMV…I would suggest $165K. You should also get 3% to 5% up front in unrefundable option consideration. And last, if your market will support it, I would get more rent. Look into $1600 to $1700 and see if that will work. Because this is more than just a straight lease (you are giving tenant/buyer a chance for ownership, and a downpayment credit) there may be room for a monthly spread. Now rework your numbers and see if this makes more sense.