Lease options - how much do you get down? - Posted by GL

Posted by Paul on June 21, 2000 at 22:41:17:

If they can’t get financed at the end of their lease, they move on and you find yourself another hungry tenant buyer, raise the sales price and most likely the monthly rent payment,get another non-refundable option consideration payment, and your much better off than you were before. Typically your deal from the seller is 3-5 years, and you are sub-leasing for 2 or so.
Hope this make sense.

Lease options - how much do you get down? - Posted by GL

Posted by GL on June 21, 2000 at 22:01:40:

Around here the standard rental agreement involves the renter paying first and last months’ rent in advance, before moving in. I gather that in the case of a lease option you get 3% to 5% of the value of the house as earnest money, in addition to the prepaid rent. It sounds to me as if the LO renters would be paying practically as much up front as if they bought a house outright? Are my figures wrong or will LO purchasers actually come up with this kind of money? I thought one of the advantages of the LO was that they did not have to put up a lot of cash?

Re: Lease options - how much do you get down? - Posted by ronnie

Posted by ronnie on June 21, 2000 at 23:28:53:

Yes, most gurus go by the 3-5% rule. And in my experience, they are right. When I foolishly let people in to a L/O agreement for the equivalent of 1st and last month’s rent, guess what happened: They had a tenant mentality. They had nothing to lose - it was a rental in their minds … so they paid late … or … ended up not paying. Go for 3-5%, bare minimum 3,000 in my opinion. 5000 (or more) is even better! Now they have something to lose if they don’t perform. And the mentality is that this is truly a lease/OPTION! Keep in mind, that people who can buy a house with 3% down have to have reasonably good credit. So … someone with credit that’s not quite great yet … should want to jump at the chance to get into a home NOW that they can buy later. You want to attract future buyers … not bad tenants. Having them put down significant consideration is the way to do that (assuming the house is in good condition in a desirable neighborhood).


Re: Lease options - how much do you get down? - Posted by The Donald

Posted by The Donald on June 21, 2000 at 22:52:32:

First and last - in Ontario this is a given for the lease.

For the option - get consideration of anywhere up to 5% non-refundable option consideration - if they walk away or fail to pay rent or abide by the lease - they lose it.

Make up the down payment/deposit amount by crediting them for a portion of rent as you go - again, non-refundable credits, of course.

In as long as you have a working relationship with a mortgage broker to PRE-QUALIFY for tenant/buyer, you won’t have a problem.

Best approach: Have them complete both a Rental Application, plus a Lease - for the Tenancy. And have them complete a Mortgage Application for your mortgage broker.

Take the Rental Application and Mortgage Application at the same time first. Then the Lease when they are approved, together with a separate option agreement to CYA.

Since it’s rent-to-own, you’ll need to make certain that when the time comes and the option is exercised, your T/B will be able to perform.

Remember, you want as much real cash (not credits) in your pocket as soon as possible :slight_smile:

Re: Lease options - how much do you get down? - Posted by Laure

Posted by Laure on June 21, 2000 at 22:23:49:

My L/O Tenants have paid as little as 1250 as option money and as much as 5k. Typically, I am finding that a “good” L/O Tenant can come up with 3k. I have made that my standard. Sometimes they offer me more money to reduce the monthly payment. I will do that too. My houses are priced from 59k to 100k. If they don’t have the option money, I wait for someone who does. I have concidered writing a promissory note for the option money, but haven’t done that yet. There are enough people with 3k down, that I don’t feel I need to wait for the money.

Also, there are other reasons people don’t want a traditional loan, or can’t get a loan besides down payment. It’s not always the deciding factor.

Laure F :slight_smile:

Re: Lease options - how much do you get down? - Posted by JohnBoy

Posted by JohnBoy on June 21, 2000 at 22:19:47:

There are a lot of people out there that have money to put down. But for one reason or another they can’t or “think” they can’t get financed. Usually credit is the most common reason. Other reasons may be because of time on the job, self employeed, etc.

As an alternative to being able to get financing a L/O would work well for them by allowing time to rebuild credit, establish work history, show an on time payment history on the property, etc.

Since the goal is to own a home of their own, L/O is a better alternative vs. just renting.

There always seems to be a “magic number”… - Posted by Carmen_FL

Posted by Carmen_FL on June 22, 2000 at 08:07:37:

In my neck of the woods, it’s $4,000. Ask for more, and you’ll wait a long time to get it! For some reason, though, if you ask how much they have, EVERYONE seems to say $4,000. The one time I did find someone with $6,000 down, we did a land contract with a ballon instead, because they were more comfortable with that than an L/O with that much down. It’s all in the mind, sometimes.

If they can’t get a loan what happens when the lease ends? - Posted by GL

Posted by GL on June 21, 2000 at 22:31:55:

I can see your point. But if they can’t get a mortgage due to being self employed or if they do not want a mortgage hanging over their heads then nothing will change when the lease ends. Perhaps that is why half or more of LO buyers never exercise their option. But then why do they pay good money for it?

I really am trying to understand this but it sounds nuttier the more I look at it.

Re: If they can’t get a loan what happens when the lease ends? - Posted by Laure

Posted by Laure on June 21, 2000 at 23:59:50:

My closing ratio is much higher than 50%. I think this is due to the fact that I take them to my mortgage broker before I ever take their money. I do have them sign the dotted line first. We get the info we need to get financed within our timeframe. If a T/buyer can’t get financed within our term, I don’t take their money. If they enter the L/O, then screw up their credit as to not get financing, then it is their fault, not mine. I feel this is my moral responsibility to take them throught the process. I also feel it creates trust between us, and lets them know that I am SERIOUS about completing a sale on the property.

Laure :slight_smile:

Re: If they can’t get a loan what happens when the lease ends? - Posted by JohnBoy

Posted by JohnBoy on June 21, 2000 at 22:55:42:

If they can’t get a mortgage due to circumstances at that time that were out of their control, then you can renew for another term with them to allow them more time. You can raise the rent, charge additional option consideration, adjust the option price, or any combination of those or let it ride for another year by extending the term of the lease and option. It’s your call.

If they just don’t want a mortgage or they failed to do the things they were required too, like take care of some credit issues, then they’re out. The option money is forfeited.

They pay the money for it so they can eventually buy the home. As long as they perform on their end they shouldn’t have a problem getting a loan later. That’s assuming they had a chance of getting financed within a year or two when they entered into the agreement. If they exercise the option, then the option money is applied to the purchase price. If they look like they don’t have any chance of being able to get a loan within that time frame then I wouldn’t accept them. I only want people that want to buy and have a fair chance of getting a loan later providing they perform on their end.