Please help brainstorm this situation - Posted by Craig

Posted by Craig on July 01, 2003 at 15:19:03:


Thanks for the feedback. In response to your questions, I purchased the home as a personal residence when I was living in NC a few years ago. I decided a L/O was my best exit strategy given that I didn’t have much equity in the house and I didn’t want to dip into my pocket to my an agent’s commission. The tenant plans to purchase with a conventional loan and the $11k he has “saved” is to be his down payment. I have documentation of all payments and will back the fact that he has been “saving” credits toward the down payment. And the difference between applying the cash toward the down pmt vs. reducing the purchase price is the fact that the tenant does not have cash to use as a down payment. This $11k is essentially his 5% down, which will allow him to finance the rest.

Please help brainstorm this situation - Posted by Craig

Posted by Craig on July 01, 2003 at 13:23:02:

Hello all!

I have a tenant/buyer in a home in NC, and I currently live in CO. He has rented the home for just under two years and plans to purchase in November at the end of the lease purchase term. The problem is, there was some miscommunication when we first signed the contracts and now it looks like this may delay or kill the deal. It shakes out like this:

Initial price was $210,000 with $5000 up front option fee and $6000 in rent credits ($250/mo for 2 years). The terms were that the purchase price would be reduced to $199k at the end of two years, tenant would purchase and we would go our merry way. However, after speaking with the tenant recently he is under the impression that the credits would be applied to his down payment. Now, since I live 1600 miles away and can’t afford to find a new tenant, do not want to list with an agent, and really just want to be done with this tenant and the whole deal altogether, I told the tenant I would front the $11,000 for his down and the purchase price would be $210,000 and I still get my price of $199k.

That’s all well and good, but the houses in the area only appraise for $205k at the most. So my real problem is what the heck do we do if the house doesn’t appraise for $210k? Or is there a sure-fire way we can get the house to appraise for $210k?

Your feedback is very much appreciated!

Re: Please help brainstorm this situation - Posted by Mich_Mike

Posted by Mich_Mike on July 02, 2003 at 08:45:26:

One other option to consider: Some lenders will treat a 2 year L/O as a “purchase” with equitable value. That means that your T/Ber may be able to refinance to pay off the seller (you).
I am not sure about the laws/norms in NC, so you might want to give a few mortgage brokers a call.
Hope this helps!

Re: Please help brainstorm this situation - Posted by B.L.Renfrow

Posted by B.L.Renfrow on July 01, 2003 at 21:10:22:

You have received good advice below, but here’s another point: in a lease option, where the T/Ber ultimately plans to purchase with conventional financing, it’s not up to you or the tenant whether option money and rent credits will or won’t be applied to the down payment. That would be solely up to the lender, and some will, while others won’t.

You shouldn’t tell a T/Ber the money will apply to the down payment, unless you intend to owner finance, in which case you can do whatever you want. The safest thing is to just tell them you will apply the amounts in question to the purchase price.

In general, if a lender will allow L/O funds to be credited to the down payment, it would be limited to the option consideration and any amount of the rent which is above market rent for similar properties – assuming such payments can be adequately documented.

Brian (NY)

Re: Please help brainstorm this situation - Posted by James (FL)

Posted by James (FL) on July 01, 2003 at 16:00:23:

If his credit is decent, he should have no problems getting a 95% conventional loan. If you can document the monay he gave you two years ago, and it is in the contract for rent credits, that should suffice as his 5% down payment also. All that is left is closing costs. As far as an extra 5K on the appraisal goes… don’t worry at all about that. Supply the appraiser with the purchase contract and let them know it needs to come in at $210K. If they are willing to play ball, find another appraiser. you can get it done fairly easily. If his lender is having trouble with it, he should find another lender, or maybe he just isn’t as qualified as he is saying.
Take Care

Mortgage Broker - Posted by Joe Eckburg

Posted by Joe Eckburg on July 01, 2003 at 15:41:17:

Find a lender or mortgage broker who understands the situation. In my mind, the purchase price is 210K. He put up 5K and 250/mos as rent would be applied to the principal, in the form of part of the down payment. If the initial agreement states the above then there should be no problem. Or, if he paid above market rent (say 250/mos above), you could show that to the lender.

I don’t think it will be a problem to get a house to appraise for 5K above the market when you have a signed agreement for the higher price. That is, the house is worth what someone (your T/B) is willing to pay for it.

If all else fails, sell it to him on contract for the 210K price, show a down payment of 11K, then have him refinance in 6 months. Give him a good interest rate but not so good that he won’t want to refinance.

Hope this helps.


Re: Please help brainstorm this situation - Posted by John (Rome)

Posted by John (Rome) on July 01, 2003 at 15:04:40:


just one piece of information - how does he intend to buy - using a loan? or all cash? if he’ll be going conventional he might well need to prove that he has in fact plunked money into the property. Incidentally, just out of sheer curiosity how did you acquire the home?
That said - and personally mind you, I don’t see what the difference is between it going towards down or final purchase price (you’ve received it) and for sure I wouldn’t give a hoot about giving it to him for 205 if that’s whats necessary to close the deal - but then again it’s hotter than lucifer’s behind over here and my brain along with my thought process may well be scrambled…