Lease Option Help - Posted by Michael

Posted by Stacy(AZ) on May 12, 1999 at 11:55:17:


The downpayment credit is in reality just an agreement between you and the seller that some amount of your monthly payment will be considered an installment for a down payment. Although it should be deposited separately from your “rent” payment to document it, it can still be used by the seller for any purpose, such as making payments on the underlying loan.

For example:

His payments are $750/mo.
You pay $600/mo for rent, $150 downpayment credit.
He deposits them separately, but uses the money to pay his mortgage payment. At the time you buy the house, the total of all the $150 payments you made up to that time are considered downpayment money.

This is what I was trying to get at with my original post.


Lease Option Help - Posted by Michael

Posted by Michael on May 11, 1999 at 10:52:02:

I am purchasing a home for my wife and I no money down…Now here is my question. He was asking 78,500 and after the option period we would owe 75,500. Thank goodness he is also an aquaintance of mine so I didnt feel overly stupid asking him this question. But I asked him if he would object to making the price of the house 85,500 and after the option period could we still owe 75,500 since he was only expecting to get 75,500 anyway. I thought this would help us with getting financing after the option period as we would have more equity…and also i thought we would be able to sell it for more if we wanted to. He agreed, if thats what we decided to do…nothing is set in stone yet, and i wanted to check with the newsgroup here and see if this was a good idea before we go through with it. The house has been in his family for a long time and he was trying to help us with getting our first home so he lowered the price…It would easily appraise for 85,000 (Most likely a more). 4 bedrooms, 2 baths, living room, dining room, kitchen ( a huge kitchen), laundry room, tool room, enclosed back porch, and a garage…hardwood floors throughout and in a very nice part of town, it sits on a half acre. Whatever your suggestions might be I would sure appreciate hearing. Thank you.

Re: Lease Option Help - Posted by JPiper

Posted by JPiper on May 11, 1999 at 17:28:05:

Actually all of this is moot.

You should be able to find a lender who will do this as a refinance after one year?.NOT a new loan. Therefore, the loan will be a percentage of the appraised value. I don’t see any particular advantage or reason to jockey the sales price around one way or another. After one year if your balance due is $75K and the house appraises for $85K, you’ll need to find a 90% refi, owner-occupied. This shouldn’t be a problem assuming your credit and income support the loan. Whatever equity is above the option price is your equity. If the house appraises for $90K you would need about an 85% refi.

Check around with a few mortgage brokers.


Re: GOB trade in your L/O - Posted by Bill Gatten

Posted by Bill Gatten on May 11, 1999 at 13:46:07:


A couple of things. Like Phil F. said, when his sale price increases; his Gain over Basis (GOB) increases along with his losing his 1031 Eschange priviledge ('not even an issue though, if he’s not interested in an Exchange, or if the property has been his place of residence). In the process of artificially inflating the Transfer Value of the property, your Tax Basis increases, reducing your Gain over Basis by the same amount that his increases.

I would suggest… especially if he’s a good friend trying to help you this way…that you explain the tax ramifications to him, if he’s not already aware of them. 'Could end up costing him a couple thousand extra bucks. Remember that by his (your) artificially inflating the price, you gain all that he loses. A “morality/conscience trade” might entail offering to increase your actual acquistion price proportionately with his tax loss (his accountant can tell you what that would be). Whatever the extra amount turns out to be, you’ll get it all back when your own Gain over Basis is calculated upon your disposition of the property.


Re: Lease Option Help - Posted by phil fernandez

Posted by phil fernandez on May 11, 1999 at 11:50:24:

Keep in mind that your seller will be paying taxes on the extra $7,000 that he will never realize. $85,500 bumped up price minus $78,500 your actual purchase price.

Of course if this has been the sellers primary residence for 2 out of the previous 5 years there will be no tax on any gain as long as the gain is under $500,000 if he’s married or under $250,000 if he’s single.

Re: I think it’s a good idea - Posted by Stacy (AZ)

Posted by Stacy (AZ) on May 11, 1999 at 11:14:53:

I’m not a L/O expert (yet), but I think this is a good idea, especially if the appraised value will support the 85,500 figure. It’s important that your down-payment credit is deposited by your seller using a separate deposit slip each month, so he can prove you actually paid the full downpayment amount when you go for financing. So, just make sure he adjusts the amount he’s going to document that you paid during the option period to support the higher figure.

I’ll be interested in comments from the experts as well.


Re: The Option Period - Posted by Michael Wright

Posted by Michael Wright on May 12, 1999 at 09:45:46:

The option period is 48 months, not one year…if we decide to buy before then then we would owe more than 75,500…the 75,500 is only if we lease for 4 years…does that make a difference?

Re: The Buyer Wants the Price Raised?!? - Posted by Michael

Posted by Michael on May 11, 1999 at 12:02:14:

That was his reaction to my idea, but I told him I wasnt sure but I think in this situation the price is really nothing but a number. I just wanted to be sure I wasnt going to hurt us with this…

Re: The Option Period - Posted by JPiper

Posted by JPiper on May 12, 1999 at 10:15:44:

No it doesn’t. The lender will still do an appraisal, and will still look at the payoff versus the appraised value. But obviously whether lenders offer this program 4 years from now is always a question. Things do change.

I might add that the monthly rent credit here looks quite small.

Just make sure you document everything, and that you pay on time with a check so that you can prove your payment was made on time. Make sure the seller cashs the check on a timely basis. The lender will want to look at the checks.


Re: The Buyer Wants the Price Raised?!? - Posted by Stacy (AZ)

Posted by Stacy (AZ) on May 11, 1999 at 12:50:35:

Yes, your montly payments will remain the same, but the amount credited to downpayment is increased. That’s the way I took it.


Re: The Option Period - Posted by Michael

Posted by Michael on May 12, 1999 at 11:45:33:

The monthly payment is exactly his mortgage payment plus his insurance and taxes…he is literally making no profit off of us what so ever…it just keep his payment made and helps us out…