Rule of thumb for rent credits? - Posted by Michael Murray

import · March 12, 1999, 10:46pm

Posted by Michael Murray on March 13, 1999 at 22:56:17:

nt

import · March 12, 1999, 10:46pm

Posted by Michael Murray on March 12, 1999 at 23:46:05:

I am in the negotiating process for a house on 41 acres for my wife and myself. I will be setting it up for a L/O. Is there any unwritten rule as to what is reasonable or acceptable to ask for as rent credits toward the purchase price?
Thanks,
Michael

import · March 16, 1999, 8:18am

A few options - Posted by rayrick

Posted by rayrick on March 16, 1999 at 09:18:35:

It seems to me that everyone I ask has a different approach on rent credits. Here are a few of my favorites (I hope it’s okay to share these, guys!):

$100/mo, an extra $100 at end of year as a bonus for being a great all around tenant.
50%: If you really want someone in there fast, and you would like to get cashed out fast, you can often have someone accumulate around 10% equity in a year through their option consideration and a 50% rent credit. They can then get new financing as a re-fi. If you are doing a sandwich L/O and your seller is very anxious to get cashed out, this is one way to go.
Average monthly contribution over a two year period from a 30 year amortization schedule at some particular interest rate (that was a mouthful!):
You treat it very much like a contract for deed- you look at the buyer’s credit and pick an interest rate accordingly. You then work out a 30 year amortization for your selling price at that interest rate. You then see what the average amount of prinicipal paydown per month is over your lease period (say two years). This amount is the rent credit.

A lot of the decision boils down to this- do you want to get cashed out, or do you want long term cash flow? A generous credit encourages the former, a smaller one the latter.

-Ray

import · March 13, 1999, 4:56pm

What?? No opinions? - Posted by Michael Murray

Posted by Michael Murray on March 13, 1999 at 17:56:17:

I guess rent credits are not a very exciting topic as no one has yet responded. Many of us doing L/O’s might be interested though. Can anyone give some insight as to what percentage is commonly accepted as reasonable for rent credit toward purchase? Or is it completely subjective, dependent on what the market will bear, and not easily defined?
Thanks for your input,
Michael

import · March 16, 1999, 4:22pm

Re: A few options - Posted by JPiper

Posted by JPiper on March 16, 1999 at 17:22:13:

A generous credit well in excess of the principal paydown on an amortization schedule might encourage me to continue to lease/option rather than to refinance. Depends on the exact numbers, and whether the buyer needs equity or simply time to refinance.

JPiper

import · March 16, 1999, 10:47am

Thanks Ray - Posted by Michael Murray

Posted by Michael Murray on March 16, 1999 at 11:47:08:

That is very helpful. I appreciate the input.
Michael

import · March 14, 1999, 1:13am

Re: What?? No opinions? - Posted by John Katitus

Posted by John Katitus on March 14, 1999 at 02:13:15:

I have no idea of what’s “customary” and I doubt that it exists, which is probably why you didn’t get any immediate feedback, but here is my custom.

I try not to give any rent credit. If the buyer brings it up, it’s usually because he thinks the monthly payment is too high (and he’s right, because I priced it at the high end of the range because I know I can get it). I then concede $50, maybe even $100 per month if he insists. He quickly subtracts that amount from the monthly payment and decides he has an acceptable deal. From my end, even if the option goes two years (most of them don’t because I call in my mortgage broker after 6-12 months and get him a mortgage), the concession only costs $1000-2000. If the property is also priced at the high end of the range as it should be, that’s not too much to give up.

Is the person you are buying from an experienced investor or just trying to get rid of a property? If he’s experienced, he may very well be using the same logic. If he’s not, he might not have priced the property at the high end. Either way, you need to have an ACCURATE idea of the property’s value and look at the entire deal - deposit, monthly payment, and option price. And of course, ask for the highest monthly credit you can make yourself ask for. You can even tell him that in Ohio it’s 100%, and I told you so.

We can be more helpful if you post the specific numbers and value. Good Luck.

import · March 13, 1999, 9:33pm

I’ll Take A Stab At It - Posted by Bill K. (AZ)

Posted by Bill K. (AZ) on March 13, 1999 at 22:33:36:

Michael,

I’m planning on doing L/O’s. I’m looking for as much credit as I can get from the seller (minimum: 20%, maximum: whatever the seller agrees to). On the other end, I’m looking to give as little as I can. This will help to keep the buyer’s equity low and reduce the possibility that they will have an “equitable interest” in the property should they not exercise their option and not want to go quietly into that good night. So, I’m looking to keep buyer’s rent credit around 10% to 15%.

I hope this helps.

Bill K. (AZ)

import · March 16, 1999, 6:58pm

Thanks Jim (nt) - Posted by Michael Murray (CO)

Posted by Michael Murray (CO) on March 16, 1999 at 19:58:03:

nt

import · March 14, 1999, 9:49am

Thanks John - Posted by Michael Murray

Posted by Michael Murray on March 14, 1999 at 10:49:01:

Thanks, that is very helpful.
Michael