Posted by Doug,ky on October 01, 2003 at 07:56:08:
Thank you for posting.
You are correct in I’ve only leased optioned one property and they never exercised the option and i still own it today. I guess i got the impression from other sourse (banking) that the option money could be credited to downpayment but the rent credit had to be against the purchase. But, your saying some lenders will let the additional money above normal rent be credited as downpayment. So is this all spelled out and written down into - Well I would not think this would be documented in the lease agreement, but in the option contract. Is this correct?
Rent to own, Lease option experts??? - Posted by Doug,ky
Posted by Doug,ky on September 30, 2003 at 13:54:34:
I have always bought and held properties, until now. I have a marginal property that i want to move retail. I always thought if I gave a rent credit it went against the purchase prise and couldn’t be used for the downpayment. Is this right? Because I saw an ad that said Rent to own, low down, ask about downpayment pprogram. Called and this guy was talking about using a form of rent credit for the downpayment. Would like to hear from those of you that do this.
Traditionally lenders tend to view rent credits as credits towards the purchase price NOT DOWNPAYMENT FUNDS. Sometimes you can convince them otherwise, but usually not. Depends on the lender. Typically if I can get a L/O tenant to stay for 2 years with payments on time, I can get their application treated like a refinance not a purchase. So, then it doesn’t matter which side of the equation it ends up on.
What I like to do however is get them to pay extra above and beyond market rents and give them credits on that. For instance, Rent is $750/mo, they are trying to save money for a downpayment. If they give me an additional $200/mo. I will give them a 50% credit on that $200. So, each and every month they are saving $300/mo towards the downpayment. This is in my OPTION agreement, not my lease agreement. This money is non-refundable option consideration. In that way I took a rental that was bringing $650/mo in, and turned it into a lease option bringing $1050/mo in.
You can probably use it either way. I show it in the Option Contract as reduction in sales price, as sometimes Loan providers, can’t understand the downpayment route and want all kinds of proof. It’s easier if you just deduct it from the purchase price. Also, be sure and state in Option that the monthly credit given only applies if the Lease amount is paid on time. This is another good incentative for people to pay on time. Then keep a record and stick to it.
Re: Rent to own, Lease option experts??? - Posted by TroyT
Posted by TroyT on September 30, 2003 at 15:00:01:
Sure you can put it towards the Downpayment. Just keep a record of the Tenant/Buyers payments to you monthly, the amount you are crediting to them ($100 / month for example), and then when it comes time to close, you have a record to show the Financing Company that they have indeed been paying the Downpayment.
Some people argue - should you put to towards the purchase price or the Downpayment. I really don’t care, I’ll put it towards whatever they want. The deal is usually structured with enough margin to me that I’m not too picky.
I like crediting it to the Downpayment because I feel it gives them more incentive, and is easier at the closing table to come up with any kind of Down Payment that they need.
Troy, your reply “Sure you can put it towards the Downpayment.”, while well intentioned is inaccurate. Most every lender I have ever worked with has flat out rejected rent credits as part of any down payment. To tell a tenant/buyer that their rent credits will be part of their down payment, and then not being able to deliver on that promise, is an invitation to a lawsuit.
Always stipulate that rent credits and option money are a credit towards the purchase price. If the tenant/buyer can find a lender who says otherwise, good for them.
Re: Rent to own, Lease option experts??? - Posted by Craig (IL)
Posted by Craig (IL) on September 30, 2003 at 17:07:21:
I think its best to allow the money to go against the puchase price OR as down payment. This gives the buyer options when talking with the lender who will ultimately fund the eventual purchase.
Lender’s will NOT allow all rent to go as downpayemnt. Lenders will only allow what is above normal and customary rental rate. So, for instance, if the normal and customary rent in the property area is, $700/mo.), you could charge $850/mo., $150 of which may be applied as down payment money or against the purchase price. Another option some sellers use is to first agree on the rent rate and then give the buyer an additional deduction of $x.xx for ever $y.yy dollars above the rental rate the enter/buyer agrees to pay monthly. So, using the above example, you might agree that the $150/mo. is credited towards downpayment and you, as seller, will credit another, say, $100/mo. off the purchase price. This way, you are collecting more money up front.
Remember that by agreeing to a lease-option, you are tying up your property and the buyer should pay for that priviledge. Without sufficient money up front, your are taking a risk for potentially nothing in return. Some sellers charge a nonrefundable option fee of, say, 3-5 per cent of the purchase price to “buy” the option, all of which applies against the eventual purchase. If the buy fails to exercize the option, the buyer forfeits ALL moneys paid to the seller.
How long will the option be? If your in an area where property is appreciating, what will the fair mareket value when the option is exercized. Don’t forget to to figure this into the agreement. There are various ways of figuring this, see your attorney.
There are a variety of dangers. Don’t go forward without using an attorney EXPERICED WITH LEASE OPTIONS. Most attorneys have never had any experince, though many will say they can handle it. It’s clear from your post that you know little about the lease option. If I were you I would chose your attorney wisely.
Interesting. That must be the case in your experience.
My lenders that I hook my T/B’s with have accepted the Credit towards the Downpayment. I have my Mortgage Broker factor this into the deal when I send them to him. I sign an acknowledgement that the downpayment has been received.
I am in Canada, I don’t know if that is a difference, but I sense that might not be. Perhaps it is the Lender.
This is my experience, therefore not inaccurate in my experience. I’ve done this on about 14 properties.