Lease Option Help - Posted by Dan

Real Estate Investing
1

Posted by JohnBoy on May 01, 1999 at 10:46:25:

You draw up a lease-option contract showing the 5% ($8745.00) as “Non-refundable option consideration”. Use separate contracts, one for the lease and one for the option. Show the option consideration paid in the option contract. Also show the tenant would receive a $200 a month rent credit in the option contract, IF the tenant exercises the option. The lease should be a separate agreement not pertaining to an option.

Something doesn’t sound right with your numbers on this deal. If your only putting down only 5% on a $174,900 property and your payment is only $1100 then that means your getting this loan for under 7% interest. And that’s not even accounting for closing costs, monthly taxes, and insurance.

Also you would be buying this property as a non-owner occupied which is going to be an even higher interest rate especially with only 5% down. My guess is the monthly PITI on something like this is going to end up around $1800 - $2000 a month on a $174,900 property. The 5% your putting down will be eaten up in closing costs unless the seller has agreed to pay all the costs.

What is the interest rate on your loan going to be? What are the taxes on this property? Who’s paying all the closing costs? Are you going to be using a broker or a bank? What kind of points will they be charging you to do the loan?

What happens if your friend defaults on the payments? Are you in a position to get stuck with the payments until you get him out and find another tenant to l/o to or until you resell the property?

What is this house worth? Will you be paying retail or is this way under market value where you would be getting plenty of equity in the deal should your friend default on the payments, allowing you to recoup all your costs that will be involved so you can come out ahead on this deal?

I wouldn’t want to put myself in that kind of a position on a deal where I’m going to be the one responsible for a $175k mortgage where I’m only going to get $200 a month for my risks involved. Not to mention risking a friendship if your friend defaults on the payments.

Your friend should try and find a motivated seller that would be willing to carry back a 15%-20% second with his 5% down and get his own mortgage. Or find a motivated seller that would l/o their house to him or sell on a contract. My impression on this deal based on your post sounds like your friend has found a house that he “wants” so bad, that he’s willing to risks a friendship by getting one to finance the home for him so he can get want he wants instead of getting what he can get on his own. He’s asking a lot for a friend to sign their name to a $175k mortgage and to trust him to make the payments while he already has a history of bad credit.

Unless this house is worth at least $200k and is in execellent condition needing no repairs, and I was going to get at $5k-$10k up front in my pocket, plus $300 - $400 a month cash flow out of it, I wouldn’t be interested in doing the deal.

My advice would be not to do a deal like this with a friend unless your willing to risk your friendship over this and risk getting stuck with the property and possibly end up losing money out of your pocket in the end.

Sorry to sound so negative about this, but to me it’s just not worth risking a friendship or even the risk involved based on your numbers your giving.

JohnBoy

2

Lease Option Help - Posted by Dan

Posted by Dan on May 01, 1999 at 09:53:12:

Hello Everyone,

A friend of mine wants to buy a house for $174,900. His credit isn’t the greatest so he would need
to put 20% down. He doesn’t have 20%, he does have 5% to put down. I can buy the house for
5% down. He said he would give me his 5% so I wouldn’t have to use my own money. The monthly payments would be around $1,100. He asked if we could draw up a lease option and he
would pay me $1,500 a month, where $200 of it would go towards the down payment and I would receive $200 a month positive cash flow.

My questions:

If he were to give me the 5% to put down on the house so I could purchase it, how would this work in 12 months to show that he has really put down the 5% plus the $2,400.
($200 x 12 months)??

Can his down payment on the house be used as option consideration?

Thanks for your help.

3

Bad Credit - Posted by Sean

Posted by Sean on May 01, 1999 at 21:48:51:

If he has bad credit now, what is going to suddenly make it enormously better in 12 months so that he can exercise the option?

I also agree with the other posters; your numbers are off. You should calculate the amount you would have to pay on this property including principal, interest, taxes and insurance (PITI) and divide that by 0.75. That is the lowest amount you should charge anyone to lease the place. In this case I imagine it will be not less than $1800 a month.

4

In addition to what JohnBoy wrote… - Posted by FJW

Posted by FJW on May 01, 1999 at 11:33:38:

It will not be so easy, if at all possible, to get 95% LTV NOO, but especially, you’ll need to bump up the option price because at $200 a month going towards the down payment (always state purchase price, not DP) you’ll owe more on the loan than you’re agreeing to sell it for. At best, with your numbers, if you could get the loan, and are willing to accept the risk and your friendship, I’d say at least $1500 and no credit towards purchase plus the equivalent of another 2, 3, 4, payments towards consideration.

In addition, if anything horrible were to overcome your friends loyalty and he was unable to fulfill his commitments, he could possibly imply (and litigate?)that it was intended as a loan. Then you’re into usury law problems and the whole bit. I’m sure you could be saying to yourself “Oh no, he would never do that.” Hopefully he wouldn’t, but that’s also part of YOUR risk…in addition to whatever else I, you or anyone else can think of.

Some of the sadest and happiest events I’ve ever witnessed were of friends and family getting into some sort of business partnership/relationship. They can work, but the risks are usually higher than anyone can envision.

Good Luck and be careful.

FJW

5

In addition to what JohnBoy wrote… - Posted by FJW

Posted by FJW on May 01, 1999 at 11:33:38:

It will not be so easy, if at all possible, to get 95% LTV NOO, but especially, you’ll need to bump up the option price because at $200 a month going towards the down payment (always state purchase price, not DP) you’ll owe more on the loan than you’re agreeing to sell it for. At best, with your numbers, if you could get the loan, and are willing to accept the risk and your friendship, I’d say at least $1500 and no credit towards purchase plus the equivalent of another 2, 3, 4, payments towards consideration.

In addition, if anything horrible were to overcome your friends loyalty and he was unable to fulfill his commitments, he could possibly imply (and litigate?)that it was intended as a loan. Then you’re into usury law problems and the whole bit. I’m sure you could be saying to yourself “Oh no, he would never do that.” Hopefully he wouldn’t, but that’s also part of YOUR risk…in addition to whatever else I, you or anyone else can think of.

Some of the sadest and happiest events I’ve ever witnessed were of friends and family getting into some sort of business partnership/relationship. They can work, but the risks are usually higher than anyone can envision.

Good Luck and be careful.

FJW

6

Re: Lease Option Help - Posted by JohnBoy

Posted by JohnBoy on May 01, 1999 at 10:46:25:

You draw up a lease-option contract showing the 5% ($8745.00) as “Non-refundable option consideration”. Use separate contracts, one for the lease and one for the option. Show the option consideration paid in the option contract. Also show the tenant would receive a $200 a month rent credit in the option contract, IF the tenant exercises the option. The lease should be a separate agreement not pertaining to an option.

Something doesn’t sound right with your numbers on this deal. If your only putting down only 5% on a $174,900 property and your payment is only $1100 then that means your getting this loan for under 7% interest. And that’s not even accounting for closing costs, monthly taxes, and insurance.

Also you would be buying this property as a non-owner occupied which is going to be an even higher interest rate especially with only 5% down. My guess is the monthly PITI on something like this is going to end up around $1800 - $2000 a month on a $174,900 property. The 5% your putting down will be eaten up in closing costs unless the seller has agreed to pay all the costs.

What is the interest rate on your loan going to be? What are the taxes on this property? Who’s paying all the closing costs? Are you going to be using a broker or a bank? What kind of points will they be charging you to do the loan?

What happens if your friend defaults on the payments? Are you in a position to get stuck with the payments until you get him out and find another tenant to l/o to or until you resell the property?

What is this house worth? Will you be paying retail or is this way under market value where you would be getting plenty of equity in the deal should your friend default on the payments, allowing you to recoup all your costs that will be involved so you can come out ahead on this deal?

I wouldn’t want to put myself in that kind of a position on a deal where I’m going to be the one responsible for a $175k mortgage where I’m only going to get $200 a month for my risks involved. Not to mention risking a friendship if your friend defaults on the payments.

Your friend should try and find a motivated seller that would be willing to carry back a 15%-20% second with his 5% down and get his own mortgage. Or find a motivated seller that would l/o their house to him or sell on a contract. My impression on this deal based on your post sounds like your friend has found a house that he “wants” so bad, that he’s willing to risks a friendship by getting one to finance the home for him so he can get want he wants instead of getting what he can get on his own. He’s asking a lot for a friend to sign their name to a $175k mortgage and to trust him to make the payments while he already has a history of bad credit.

Unless this house is worth at least $200k and is in execellent condition needing no repairs, and I was going to get at $5k-$10k up front in my pocket, plus $300 - $400 a month cash flow out of it, I wouldn’t be interested in doing the deal.

My advice would be not to do a deal like this with a friend unless your willing to risk your friendship over this and risk getting stuck with the property and possibly end up losing money out of your pocket in the end.

Sorry to sound so negative about this, but to me it’s just not worth risking a friendship or even the risk involved based on your numbers your giving.

JohnBoy