Option Money Blues... - Posted by Chad and Mindy

Posted by David Garcia on February 11, 2002 at 22:43:17:

If you’re worried about their downpayment when they exercise their option, you can have them clean up the home or fix something & then you will pay them for their services by giving them a check (Tax deductible).
You go with them to the bank, they cash the check & then they buy a cashiers check for you for downpayment & you legally took care of that problem.

This was the #1 money making idea on this site.

Option Money Blues… - Posted by Chad and Mindy

Posted by Chad and Mindy on February 11, 2002 at 22:09:55:

Okay, I need someone to set me straight on this option money stuff. Can the option money be applied toward the downpayment when a tenant/buyer exercises their option to purchase the home or am I way off?

I was thinking that we could have them get their loan through a company that participated with the NEIGHBORHOOD GOLD program or something similiar in which we (indirectly)would pay for their down payment through the no down payment grant.

Does anyone out there have an easy way to explain the option money scenario with a prospective tenant/buyer? I am getting stumped on this. Thanks, Mindy

Re: Option Money Blues… - Posted by JohnBoy

Posted by JohnBoy on February 12, 2002 at 14:54:27:

As far as applying option money towards the downpayment is concerned, that is something entirely up the buyer’s lender and has nothing to do with you. You won’t be the one giving them the loan. Their lender is!

You should never mention the word “down payment” in your contract when doing L/O’s.

If you agree to credit the option money at all, then only credit it towards the purchase price to avoid any potential problems later if the tenant/buyer doesn’t exercise the option.

If your option price is $100k and you got $5k as option money, then the tenant/buyer will have to come up with $95k to exercise the option. That doesn’t change the option price that was set originally. The option price is still $100k, but if you agreed to credit the option money towards the purchase price then the balance remaining due to cash out by exercising the option will be $95k!

When it’s time for the buyer to get financing then their lender will determine HOW their option money can be applied as far as they are concerned according to their own criteria. Some lenders will allow the option money to be used as all of or part of the buyer’s down payment. Some will not allow it and determine the purchase price to be the $95k instead of the $100k listed in the option agreement. It just depends on the lender being used.

This is why you should be working with a good mortgage broker that has plenty of lenders that can meet your needs to get your buyer’s funded. A good mortgage broker will know which lenders to place your buyers through so their option money can be credited as a down payment by the lender.

It has nothing to do with what you or your buyer may call it. It boils down to what the lender giving the loan will call it. So always apply any option money to be credited towards the purchase price only!

Re: Option Money Blues… - Posted by Tim Fierro (Tacoma, WA)

Posted by Tim Fierro (Tacoma, WA) on February 12, 2002 at 24:07:42:

Yes, if you state in the option agreement that the option money is to be used as a downpayment, then it can be so.

You make the call on what to do with the option money. Different gurus and courses, and even investors, will have differing opinions on this.

  1. Have the option money be considered as a down payment.

  2. Have the option money be used towards the purchase price.

  3. None of the above or something completely different to which you and the buyers agree to. Such as 1/2 for the down and 1/2 towards the price, or nothing going for price or for down, and this is strictly the option money only with no credit.

My opinion, and I think I differ from some, is that if you are the seller and your intent is to sell at some point to this buyer; then placing the option money as the down payment is the method to use. My reasoning is that you don’t want a down payment being the cause of the buyer not qualifying for a loan. It may be easier for your buyer to get qualified later when they now have a down payment all set to go.

Others have said to not use it as a down payment as it could be construed as the ‘tenant’ has an interest in the property. So if you had to evict under normal tenant laws; you may be forced to court for a foreclosure if it is determined they are the BUYER and not the tenant.

Look at the contract for an option that you are using, and determine if it suits your way of thinking. Some forms have multiple choice to determine how to make use of the option money.

Everyone will probably agree that it is non-refundable, but make sure it is in your agreement that it is not refundable.