Pre-payment penalty / Lease purchase - Posted by Donna

Posted by JPiper on March 10, 2000 at 15:40:58:


First, no one is going to lease/option your house for $77K in option consideration.

The first step I would take is to see if a $10K, 5 year prepayment penalty is legal in your state. Pre-payment penalties are not legal in all states, and my guess is that in most states where it is legal there is a limit to the percentage of pre-payment penalty that is permissible.

Start there. Then re-post when you know this information.

Meanwhile, depending on your profit in this house, maybe absorbing a $10K pre-pay penalty could be viewed as just another cost…an expensive lesson on what not to do in the future. At least the outright sale of the house would pay the debts off, and put cash back in your pocket. Something to think about.



Pre-payment penalty / Lease purchase - Posted by Donna

Posted by Donna on March 10, 2000 at 15:05:21:

Hopefully someone will know some good answers to my questions:

My husband and I were first time buyers when we purchased our house in 1997. We bought the house through owner-terms with this “lady” (I hesitate to call her a lady), and she put a $10,000 pre-payment penalty in our contract. The payments were set up for 5 years, and if we sold the house or paid it off within that 5 years we are subject to the $10,000 pre-payment penalty.

The only way we can get out of that situation is maybe a lease purchase. We have 32 months left before the balloon payment is due, therefore, the lease purchase period would be for that 32 months.

When we bought the house, it was literally eaten up by termites, the foundation was sinking into the ground, we had to renovate EVERYTHING before it was livable. Now it is a beautiful place – probably one of the nicest places in the neighborhood. We put blood, sweat and tears into the place (no lie), and we want to make sure if we do a lease purchase for 32 months that 1.) the people WILL buy it at the end of the lease and 2.) we’re not stuck with a house that someone neglected or misused – we all know that renters and leasers do not always take care of a property.

What would be a fair amount to ask someone to put down on the place? The house has been appraised at $165,000. We have about $77,000 in debts that have to be paid now… the balance of $88,000 can be put into lease payments for the remaining 32 months and that $88,000 can be refinanced by the lease-purchaser at that time. I know if someone has $77,000 tied into a house from the very beginning, they will take care of it.

Anyone have any ideas on this situation?


Re: Pre-payment penalty / Lease purchase - Posted by MDonovan

Posted by MDonovan on March 11, 2000 at 11:36:26:

I am guessing that the interest rate on the note is pretty high. That points out her motivation for such a stiff penalty. The main idea of creative financing is to think win-win. So why not approach her with an assumption to a new buyer that she qualifies? You carry a second and then either sell it, or keep the income.

The whole reason for a ballon is to protect the lender from 1980’s style interest hikes. In a stable market, they normally are very willing to renegotiate for another period, as long as interest rates are the same, and the payment history has been good. The rate can be re-negotiated either up or down depending on market conditions.

Remember, EVERYTHING is negotiable.

Can you consider this? - Posted by Michael Morrongiello

Posted by Michael Morrongiello on March 10, 2000 at 18:25:50:

What type of instrument do you have with the seller? (land contract, trust deed, mortgage, etc.)

Is there a due on sale clause in that instrument?

If no DOS clause exists then consider selling the home to some decent prospective buyers who can come in with a good cash down payment (At least 10% and peferably more). You then hold what is called a WRAP AROUND instrument.

The buyers pay you each month (hopefully you can also earn an interest rate spread over and above what you are paying out) and then you make your payments to the “sweet old lady”.

In this way you do not violate the prepayment penalty with her.

If you find that your really NEED some of your equity out of the home in CASH now rather than 32 months or longer from now, you can consider the sale of this wrap around instrument to a note funder that will keep all liens as there are.

Michael Morrongiello

Re: Pre-payment penalty / Lease purchase - Posted by ED Copp (OH)

Posted by ED Copp (OH) on March 10, 2000 at 15:42:30:

Donna, It has been my observation that if a prospective purchaser is going to put up almost 50% in real money, going in that they will want to have the deed. I think that I would want the deed too. You might do better if you sought a secondary lender to help you get up a sufficient amount of cash to pay off your bills. Then you could work with the T/B for the next 32 months until the deal could be refinanced…ED