Re-Finance Tenant/Buyers On A Lease/Option...How? - Posted by Bill Smith

Posted by Redline on June 07, 2000 at 21:39:50:

Thanks for explaining this in such detail - I clarified a few things that I wasn’t previously sure about. :wink:


Re-Finance Tenant/Buyers On A Lease/Option…How? - Posted by Bill Smith

Posted by Bill Smith on June 05, 2000 at 18:42:01:


I just spoke with a friend who is a mort. broker, and I posed the question to her about getting a Tenant/Buyer new financing to purchase their house before the end of a L/O contract.

I wanted to know if after the Tenant/Buyer had been in the house for 12 months (and made timely payments) if the new loan could be considered a re-finance instead of a purchase and she said “NO”. This had to be purchase money. I’ve read a few times on this board, where you L/O experts discuss getting a re-finance loan for the Tenant/Buyers. (To me this seems ideal). Here are my questions:

  1. Are you getting your Tenant/Buyers a REFINANCE loan?
  2. If so, is this a matter of hooking up with the right lender?

She also said that any option consideration must be kept in an escrow account if it is to be considered down payment. (darn…there goes the party money I had planned for my first deal!)

She said they would take all monies over and above the rent amount and apply that to the down-payment, but again, it had to be escrowed and available at the time of funding.

  1. Are you guys (and gals) using option consideration as down payment money or merely as a reduction in purchase price?

Thanks for your time,
Bill - Los Angeles,CA

Thanks Everyone! - Posted by Bill Smith

Posted by Bill Smith on June 07, 2000 at 21:32:42:

Thanks Everyone! You gave me what I wanted and more!

Bill (So. CA)

Re: Re-Finance Tenant/Buyers On A Lease/Option…How? - Posted by bruce anderson

Posted by bruce anderson on June 06, 2000 at 17:23:04:

You just need a better broker, Countrywide is the 2nd or 3rd largest mtg lender in the nation and they do these as RFIs all the time. their retail is always more expensive than what a broker can get if they are willing to give you a break.

Re: Re-Finance Tenant/Buyers On A Lease/Option…How? - Posted by JohnBoy

Posted by JohnBoy on June 06, 2000 at 02:41:07:

You need a new broker. Your in Ca. Call Ed Garcia. He’s the BEST in the business, PERIOD!

It will all depend on the lender. Some will treat the option consideration and rent credits as down payment money when that lender require’s the loan to be treated as a purchase. Other lenders will treat it as a refinance to where the option money and rent credits reduce the loan amount. On a refi, the loan will be based on the LTV the tenant qualifies for against the appraised value of the property.

As far as how I’m using option money as down payment or reduction in purchase price…NEITHER! I use it to do with as I see fit. It’s my money, period!

What my contract says the option money is, “Non-refundable option consideration”. It’s not for down payment money and it’s not to reduce the purchase price. It’s the tenant paying ME for the OPTION to buy the property. That’s it! However! “IF” the tenant decides to exercise their option before it expires, then I will allow the option money to be credited towards the purchase price. Whether the lender wants to count it as down payment money for a purchase or whether they choose to allow it as reduction in the purchase price is their call.

As far as having to escrow the option money goes, that’s a JOKE! Do lenders require new home buyers that had to save their down payment money to be deposited into an escrow account until they saved up enough money?? NO! When people refinance their home, did the lender refinancing require their original down payment they made when they purchased the home to be held in an escrow account in order to get refinanced one day? NO! Get a new broker. Call Ed Garcia. This guy will dance on water next to this broker you have! He’s as good as they get.


Posted by Lori Samson on June 06, 2000 at 24:40:28:

I have been spending my option money and rent credits for years!!!If we couldn’t who would want to do them? Not me! I’d be ripping sheet rock down and painting houses again. Been there, done that, and don’t like the tee shirt!I like the polish on my nails painted ‘TiKi Punch Pink’ NOT ‘Speckled Paint Pink’!! If what she said was true I just spent the option money I got yesterday from one of my deals and I have no intention of giving it up!(I have to get my nails done tomorrow)Find someone whpo knows what they are doing or they will kill your deals. After you find a good broker call her back and in a nice way let her know the new information you found. In other words… educate her, but in a nice way.
So don’t cancel your party yet!!! Lori

Re: Don’t credit option money towards purchase price. - Posted by Bill K. - FL

Posted by Bill K. - FL on June 07, 2000 at 07:28:12:

Doing this reduces your back end profit. Credit it toward down payment and keep your back end in tact, plus make it easier for tb/er to buy.

Re: Don’t credit option money towards purchase price. - Posted by JohnBoy

Posted by JohnBoy on June 07, 2000 at 08:07:19:

How does that reduce the back end profit? Regardless if the option consideration is credited when the option is exercised by reducing the amount under a refi vs. applying it towards the down payment, the net result is the same either way.

You L/O a house for $100k. You put up $5k as option consideration. If you exercise the option you need $95k to close. If the loan is treated as a refi, you will need to borrow $95k. If the loan is treated as a purchase showing the $5k as down payment, you still need to borrow $95k. $100k purchase price - $5k option money (down payment or price reduction) = $95k needed to close.

It’s EASIER to qualify for a refi. vs. a purchase. So showing as a credit to reduce the price is better for the tenant/buyer. How ever it’s shown has nothing to do with your contract. It will depend on the way the lender wants to show it on the loan. Your contract should only show it for what it actually is, “non-refundable option consideration”, that’s it.

Re: Let’s talk about the same thing here. - Posted by Bill K.- FL

Posted by Bill K.- FL on June 07, 2000 at 09:23:58:

I am referring to a sandwich L/O. If you are going to credit the option money you have to specify upfront where the credit is going to be used. If it is going towards the purchase price you are in fact selling the home for less money (option you are crediting) than if you credit it towards the down payment or the buyers closing costs. Ex. Agree to sell to tber for 100K. 5k option consideration credited to purchase price only. Actual selling price to tber is 95K not 100K. Financing doesn’t come into the picture. 100K minus 5K option money credited towards purchase price = 95K selling price to tber. In this case you are crediting it to the price period. If the option is credited towards the down payment your actual selling price to tber remains 100K. The selling price is unaffected. That 5K might be most of the spread you have on the back end. By crediting it to the purchase price you are giving it away. By crediting it towards the down payment you allow your tber to buy without having to come up with an additional down payment or 5K less of a down payment which they might not be able to do. So in this way you facilitate a sale and keep your backend profit, instead of having an angry tber. If you were buying a house, which would you rather receive? A 5K credit towards the purchase price to reduce your buying price 5K resulting in possibly a $35/month reduction in your mortgage payment, or a credit of 5K towards your out of pocket money needed to buy now? In this case, the down payment. At $35/month or $420/year it would take almost 12 years to break even at 0% rate of return. You have to spell this stuff out clearly upfront to your tber otherwise you will create misunderstandings and conflict and possible lawsuits as we have all read about on this site relating to L/Os.

Re: Let’s talk about the same thing here. - Posted by JohnBoy

Posted by JohnBoy on June 07, 2000 at 10:05:48:

Not true.

Word it anyway you want. If that option price is $100k, that’s the selling price, period!

My contract states the Optionee has the “OPTION” of buying the property for $100k. “IF” the Optionee exercises their Option, the Option consideration shall be credited to the “PURCHASE PRICE” which is $100k.

NOTE: The purchase price still remains $100k. The balance due would be $95k. This does NOT reduce the “PURCHASE PRICE”, it only reduces the BALANCE owed.

Therefore, whether I were to specify the option money to be credited towards the down payment or towards the purchase results in the SAME BALANCE OWED. Which would be $95k at closing. Whether they pay in cash or get financing, they still have to come to closing with $95k.

I have not lost any back end profit since the net result is still getting $95k at closing.

A $5k credit towards the purchase does NOT reduce the purchase price by $5k. The purchase price is still $100k regardless. It ONLY reduces the balance due at closing.

How the option money will be considered regarding the lender will all depend on the lender and loan program they’re using to finance the deal. It won’t have any bearing on how I state the option consideration is to be credited.

If the lender treats the loan as a new purchase, then they will count the $5k option money towards the down payment from the selling price of $100k, meaning the borrower is putting 5% down and needing a 95% LTV to pay off the balance due. It doesn’t change the purchase price to $95k requiring the borrower to come up with another down payment.

If the lender treats the loan as a refi., then the borrower won’t need to show anything pertaining to the option money. The lender will base the loan on the appraised value, regardless of purchase price. If the appraisal comes in at $100k, the borrower still needs $95k to close meaning the refi will be at a 95% LTV is this case.

Getting refinanced is usually much easier than getting a new purchase loan. Don’t need to worry about down payments, only the LTV the borrower qualifies for (which most of the time is a higher LTV on a refi vs. a purchase) and what the appraisal comes in at.

No matter how you cut it, the purchase price ALWAYS remains the $100k. Only the BALANCE needed at closing is what changes, which in this case is the SAME, $95k cash at closing.

If I set the price at $100k and reduce the price by the option consideration, I still get $100k total from the sale. $5k up front from option consideration and $95k at closing.

If I set the price at $100k and show the $5k credited towards the down payment, I still get $100k total. $5k down, $95k from the loan proceeds.

The net result is the same. Where would I lose any money on the back end??? Last time I checked, $95k cash is the same as getting $95k cash.

Re: That is your understanding of it - Posted by Bill K. - FL

Posted by Bill K. - FL on June 07, 2000 at 11:06:39:

What you are talking about is crediting the money towards the down payment as I had advised from the beginning. I feel it is better to spell this out in my contracts instead of just using a generic “will be credited towards purchase price” which could mean something quite different. We are both talking about the same thing actually. By specifying the credit going towards the down payment you are guaranteeing this will happen. I don’t like to leave things to the interpretation of a lender or title company. With regards to refinancing, could go into a little more detail about some of the transactions you have done using refinancing and who was the owner, the borrower etc? The reason I ask is because I don’t see how a purchaser, not on title, could refi. Thank you.

Re: That is your understanding of it - Posted by JohnBoy

Posted by JohnBoy on June 07, 2000 at 12:40:53:

I’m not talking about about crediting the money towards the down payment. In fact, if you reread my previous post it says my contract states:

Optionee has the OPTION of purchasing the property for $100k. “IF”, the optionee exercises their option in this agreement the option consideration shall be credited to the “PURCHASE PRICE”.

It does NOT say to the down payment. It applies to the purchase price. Also notice that it does NOT say it shall be applied to REDUCE the purchase price, it clearly says to be applied TO the PURCHASE PRICE. This means the purchase price is still $100k, not reduced to $95k. The BALANCED OWED on the purchase price of $100k is reduced to $95k. There’s a big difference here.

In fact, I would not even mention the term, “Down Payment” in the option agreement. That could cause you some potential legal problems down the road.

Let’s say you mention in your contract that the option money is to be applied to the down payment? 6 - 12 months into the deal the tenant defaults on paying the rent. You file for an eviction. The tenant hires a savvy attorney that comes to court and starts arguing his client has an equitable interest in this property. He made a down payment on this deal in the form of option consideration that specifically states this in his contract where this money will be put towards the “down payment”. Now you face a good chance of the Judge forcing you to foreclose on the tenant instead of getting an eviction. Mentioning anything regarding down payment in the contract is going to put you at a higher risk.

In my contract it clearly states the money is “non-refundable option consideration”. This has nothing to do with down payments or reducing the purchase price. It’s exactly what it says it is. Option consideration. Which is consideration that has been paid to me by the tenant for giving them a predetermined option price to buy the property at a future date, taking my property off the market for a set period of time, and risking the loss of future appreaciation if the value was to increase during that time period. This money has NOTHING to do with down payments in any way.

Since I did recieve $5k as consideration for giving an option to purchase, I allow in my contract that the option consideration shall be credited TO the PURCHASE PRICE, “IF”, and “ONLY IF”, the optionee exercises their option. Otherwise the money is forfeited as paid consideration for giving them the option to purchase, that’s it.

How the option money is to be considered applied to the purchase of the property by the optionee or the lender has nothing to do with me or our contract. That is between the optionee and the lender. I can not guarantee the money can be applied to the down payment. The lender may not allow that and I would have no control over that, therefore I can not guarantee any such thing. The ONLY THING I can guarantee is that the I can sell the property to the optionee for the stated option price and credit the option consideration “TO” the purchase, IF they exercise their option. It does not credit the money to “reduce” the purchase price. It does not say it applies to any down payment.

Some lenders will allow a L/O to be treated as a refi the same as they do with a contract for deed. Some will and some won’t. I assume the reason the lender allows this is because like a contract for deed, the buyer has an equitable interest in the property. Since the buyer put up option consideration that would be credited to the purchase price, they will treat this the same as the buyer having an equitable interest in the property to justify doing a refi vs. a purchase.

Some lenders will treat the option money as being all of or part of the down payment. Some will and some won’t. Again, whether they do or not is something I have no control over and therefore can NOT guarantee any such thing as to how the money is to be treated in the form of a down payment. That’s up to the lender to decide.

My personal home was purchased on a contract for deed. I did not have title to the property until the contract was paid in full. Later I got a new loan to pay off the contract. The lender treated the loan as a refinance even though I was not on title. I only had an equitable interest in the property, that’s it.

Even if what you were claiming above about the money being used to REDUCE the purchase it still wouldn’t effect the back end profit. If I collected $5k up front, then reduced the price to $95k, I still collect the $95k at closing. The buyer may have to put more money down because they may only be able to borrow say $90k. But their $5k additional down plus the $90k loan still leaves you with $95k total at the closing table plus the $5k you got up front for a total of $100k. So no matter how you slice it, you still collected $100k for the property. By doing what you claimed would not just make $5k disappear out of thin air.