Re: Misc. L/O + Sub. to Questions - Posted by JohnBoy
Posted by JohnBoy on January 31, 2002 at 05:02:49:
#2. We don’t worry about the tenant/buyer getting any equity build up. If they do then great for them. But since we can usually set the option price for about 10% above the current FMV we are getting top dollar for the property. Unless the value was to increase more than 10% within a year, they wouldn’t be getting any appreaciation on the property. Another reason we agree to deduct the option consideration from the purchase price if they exercise their option.
If you have a property that is worth $100k today and you lease optioned it for one year setting the option price for $110k, getting $5k for option consideration, then they would need to come up with $105k in a year to buy the property if we deduct the $5k option money from the purchase price. How much more could a property be worth in one year if it is worth $100k today?
The other problem with setting the option price to be based on the appraised value at the time of exercising the option is, what if the property value goes down? Then you’re stuck with selling for less money than what the property was worth a year ago. If you owed more on your end then you would have to come up with cash out of your pocket just to close with your tenant/buyer.
Also, you should only deal with tenant/buyers that have a fair chance of being able to get financing within the term of your agreement. If they don’t have any chance at all, regardless of what they did over the next year or two, then don’t even L/O the property to them. You don’t want to get a bad reputation for taking advantage of people by taking their money while fully knowing they could never get a loan.
#3. When you buy “subject to” the original owner (the seller) is no longer in the picture. YOU now OWN the property subject to the existing financing. The seller remains liable for the loan, but they have no ownership rights left in the property. Since the seller no longer owns the property you wouldn’t send anything to the seller. You would be making the payments directly to the bank on their loan.
When your tenant/buyer exercises their option, their lender will wire the money to the title company where the closing is to take place. The title company would then cut checks made out to the lien holders that have liens against the property so the buyer can get clear title. After any lien holders are paid then anything remaining is paid to you.
#4. We do screen tenant/buyers like banks do. We just aren’t as strict as banks when it comes to approving them. Banks approve their buyers to get financing today. We approve our buyers based on the ability to be able to get financing within 1 - 2 years from today. That allows are buyers to repair any credit problems, establish job history, rebuild credit by paying on time for a year or two, etc.