? on option consideration/help me sink it in! - Posted by Kim P.

Posted by B.L.Renfrow on March 06, 2000 at 20:30:17:

Not all of them are; in fact, the vast majority of callers on my L/Os don’t have ANY money available! However, even the most unsophisticated T/Ber “knows” they can’t buy a house without a downpayment, which especially if they have credit issues, they have probably been led to believe they will need up to 20% up front. So, when they see they are able to get into a house and move gradually toward ownership for considerably less than 20%, they are thrilled.

However, I just did one for 2% option consideration. In that case, the place had been vacant for 3 months and I was about to the point where I would have taken a note for their children’s bicycle just to get someone in the home! At the Creonline convention recently, I was talking with others who have had good results by taking a smaller up front option consideration and the rest in a personal note. I had not previously considered that, but might be worth a try.

Generally speaking, this is a great time of year to have L/Os available, as people have income tax refunds which they will gladly hand over as option consideration.

I also use rent credits - generally $100 per month for every month they pay on time - which my option agreement with the T/Bers specifies will apply either to the downpayment or purchase price, at the discretion of the lender/T/Ber upon exercise.

In any event, I have had good results when “justifying” the option consideration by explaining that the money will be working for them, helping them eventually to buy, either by contributing to the DP or lowering the purchase price. But again, probably 90% of my callers have no money at all available. It’s the other 10% I want to be working with.

Brian (NY)

? on option consideration/help me sink it in! - Posted by Kim P.

Posted by Kim P. on March 06, 2000 at 08:26:23:

I think I find a house to do my first L/O. Nice house in a nice neighborhood. I understand that the option consideration is non-refundable if the new tenant backs out of the deal. But, if they purchase and close on the house, does it get credited at the closing?

Also, how do I determine how much of an option consideration to ask for? Please help me sink this in. Thanks.


Re: ? on option consideration/help me sink it in! - Posted by B.L.Renfrow

Posted by B.L.Renfrow on March 06, 2000 at 18:26:13:


Whether you, or your tenant/buyer, identify the option consideration as to be applied to down payment upon exercise is irrelevant. The reason is, every lender approaches it differently, and if the T/Ber uses a lender, it will be the lender’s call.

Around here, I am told that “a few” lenders will credit it as a downpayment on a new loan, but I have not personally encountered one yet that will. However, some lenders, usually sub-prime, will do a L/O exercise as a refi, rather than a new loan, meaning no downpayment is required.

I do not tell my T/Bers that their option consideration will apply as a downpayment; rather, I tell them that will be determined when they exercise, and that if they wish to use a lender which will not recognize it, it will simply be deducted from the agreed-upon purchase price.

Another possibility: when the T/Ber exercises, you could owner-finance with a note sale at closing. I suspect most note buyers would credit the option consideration as downpayment, as long as it was verifiable.

As far as how much option consideration is enough, I always ask the T/Ber how much they have available; occasionally I’m surprised by their answer. I once had a T/Ber pay $3k option consideration on a $40k house - and I would have been happy with $1000! If their offer is too low, you can always say, “Oh…I’m afraid the minimum I could accept is $xxxx.” While 3-5% is ideal, I never rule out taking less…it all depends on the situation.

Brian (NY)

Brian (NY)

Re: ? on option consideration/help me sink it in! - Posted by Brian S.

Posted by Brian S. on March 06, 2000 at 11:29:47:


The option/consideration money goes towards the purchase price of the home. You have a contract from a seller to purchase a property for 90k, and you L/O it to a tenant/buyer for 110k. The option consideration lowers the purchase price. That’s it. It is not a down payment. I have not seen a bank in California except this as such. It just lowers the purchase price. The tenant/buyer is responsible for getting financing.


Re: ? on option consideration/help me sink it in! - Posted by WilliamGA

Posted by WilliamGA on March 06, 2000 at 08:44:16:


The option consideration that the T/B gives you should be credited to the down payment by the bank when it is time to get new financing.

I like to get as much as possible in option consideration from my T/B’s. I think a good rule to follow is in going by the condition of the house. If it is in excellent condition, 3% to 5% should be no problem. If it needs a little work, you might have to settle for a little less. The absolute least I will accept on any property is 2k down.

Good Luck!


I get it now - I am surprised though that people will pay 3-5% - Posted by Kim P.

Posted by Kim P. on March 06, 2000 at 19:12:14:

In my area(CT)the L/O’s that I have seen have a sizable amount of the rent going towards a down payment and the term is usually 1-2 years. Now I understand the option consideration but I can’t believe people are willing to give such a high percentage. Especially since cash is the problem in the first place. If I can get 2-3%, I will be a happy camper. Thanks for the help.


It must be subject to local, here the lender will consider option consideration as downpayment (nt) - Posted by WilliamGA

Posted by WilliamGA on March 06, 2000 at 12:46:46: