Posted by JohnBoy on January 19, 1999 at 13:28:53:
You need to find the right mortgage broker to work with. You want to find a mortgage broker that works with many different lenders that offer many different programs. Find a broker that works with B-C Borrowers. They should have lenders that can get anywhere from 65% LTV up to 100% LTV depending on the borrower.
If you have a borrowerer that can only qualify for 85% LTV then have your broker set you up with a lender that allows seller carry backs. Providing you have enough equity in the deal to worth with and your goal is to get the property sold.
Lets say the property appraises for $90k in a year from now. Your buyer can only qualify for a loan at 85% LTV. 85% of $90k is $76,500. After your buyer has put down $3k and built up $3600 in rent credits after one year his balance owed to you would be $83,400. $83,400 - $76,500 = $6900. You agree to carry back a second for the $6900. Your buyer has $6600 of his own money in the deal already which is more than 5%. A lot of lenders will allow a seller carry back if the buyer has 5% of their own money to put down. So the buyer puts 5% down, the lender loans 85% on a first, and the seller carries back the other 10% as a second.
Since this is a lease-option a lot of lenders will treat this as a refinance Vs. a purchase. If it’s a refinance the loan will be based on the appraised value and not what the buyer has to put down. As long as the equity is in the property they can get the loan if they qualify and have proof of the payments being made on time over the last 12 months.
If the LTV is less than what the buyer needs to pay off the contract then one option would be to carry back the difference as a second providing you have enough equity in the deal to pay off all the underlying loans.
Other thing you should do is when you find the right broker to work with is sit down with him, go over your tenants credit and find out what your tenant will have to do over the next year to qualify for a loan. Will they need to pay off high debts? Will they need time to re-establish credit showing on time payments? Will they need to pay off collections or Judgements? Will they need to earn more income to qualify? Find out everything that will be required for your tenant to qualify for a loan a year down the road. Then you need to decide if this looks like something then can accomplish. Do they think they can accomplish this?
In the example above, is this the deal your structuring between you and your buyer? Or is this the deal between you and the seller?
Give more details on both ends of the deal and maybe we can help you with a way to structure it better. What are you paying in rent? What is your option price to buy at? Are you getting any rent credits on your end between you and the seller? Or is the above deal your deal between you and the seller?
Questions About Details in Lease/Purchase Deal - Posted by Joey P SE AL
Posted by Joey P SE AL on January 19, 1999 at 03:22:31:
Hi guys,
I’m very interested in doing lease purchase deals. I have been able to learn a lot from the “how to” articles on this site, but I still have many questions. I will try to list all of these below for all you l/p gurus and anyone else who would like to reply.
I should note before I list these that I am in the middle of a lease/purchase deal right now. Here are some details of that deal:
Home is in a very nice neighborhood. 3/2 Frame with new roof. Comps at 85-90K in the area.
Appraised Value: 85,500.00 (As of OCT 98)
Selling Price: 89,500.00 (Price after 1-2 yr l/p)
Monthly Rent: 690.00 (At or above FMRV)
Monthly Credits: 300.00 (Generous, I know)
Down Payment ~3%: 3000.00 (Non-refundable)
Okay, I will get back to this in my questions below. Here they are.
How can I sell this home at an amount higher than the appraised value if mortgage brokers in my area say that the tenant/buyers’ basis in the home has to be at or below 85% of the appraised value for them to make the loan at closing? So far I have dealt with two mortgage brokers in the area. I have explained to both exactly what I’m doing and how I will do it. I explained to them that I will get about 3% in cash as a down payment on the lease. I also explained that I will give a generous rent credit each month (right now it looks as if I’ll have to give 300-400 credit out of 690.00 just to make things work.) The first said that he understood what I was doing, but that my tenants’ basis in the home would need to be at or below 85% of the appraised value at closing. The second said that something could probably worked out at about 90% LTV. If you do the math on my deal, you will see that if I take 3000.00 down and give 300.00(whoa) in credits each month during the lease, my tenant/buyers’ basis will be down to only about 83,000.00. That’s 93%…Looks as if I will have to do the lease longer and/or give even more credits to make the thing work. I was really surprised that they would have to have so much in credits to buy at the end. I didn’t think that the mortgage brokers would be that strict. Is this normal for mortgage brokers everywhere, or is my area an exception? Anyway, I would really appreciate any ideas on how to get more money out of the deal.
2)How can I charge a premium rent above fair market if there is not a lot of interest in the deal with payments at or below FMRV? And I don’t think the lack of interest is my fault, either. I have done a LOT of marketing on this. I have run many ads. I have put up signs. I have passed out flyers. I have shown the home about five times over five weeks. Most importantly though, I have made two payments on my own to the seller! Once again, any ideas here would be greatly appreciated.
What kind of rate can I expect the tenant/buyer to get on his/her note at the end of the lease? Assuming of course that his credit is slow, but not terrible (will not put anyone in with terrible credit,)can this person expect to pay in the 10/12, 12/14, etc range? I have asked both of these mortgage brokers, and I all I can get is “It will really depend on the situation.” or “We really can’t say at this time.” I know that will depend on a lot of things (his credit then, timely payments, current market rates, etc.) I guess a better question is - What kind of rates are you guys seeing your tenant/buyers get when they put new mortgages on homes in these types of deals?
Will most mortgage brokers put a 30-year note on a home doing one of these deals? Just curious because I would think that they would not. I am not even sure yet if those in this area will. How about yours?
Well, I know this is a mess. I have had little time to put it all in though. Please look over it (and me) - I just had to get the q’s out on the board to see what kind of responses I would get. Thanks in advance for all of your replies.