Posted by Rob FL on February 28, 2000 at 19:42:17:
What happens if at the end of the option period, they can’t find a lender who will loan to them at less than 12% and they don’t have an extra $5,000? I think it might be a recipe for disaster.
My feelings. If you are interested in perpetual income try rental properties or paper investing. If you are interested in helping them get a decent interest rate, hook them up with a decent mortgage broker and credit counseling from the get go. Putting a restraint on them like you suggest is more trouble than it is worth. After all, isn’t there a reason why they can’t get a conventional loan instead of doing a lease purchase with you?
Time to play “Who wants to be a criminal?” - Posted by Daniel Lubell
Posted by Daniel Lubell on February 28, 2000 at 10:09:55:
Actually, I hope I will not be playing that game. I had a brain fart yesterday, and I wanted to run this past you guys and see if you think I am stepping on hallowed ground.
Here is my problem…
I have done a lot of lease options in my town, and to the extent that people keep paying me, life is great. I hate to get paid off. Recently, there have been a whole bunch of hard money mortgage broker types that are crawling out of dark corners of the woodwork and paying me off. Now, many of these new brokers are doing immoral, dishonest things to my lease option buyers. Things like adding tons of points to the loans, strangeling them with high interest rates and even juicing appraisals up to make the loans appear as if they are good loan to value deals to their funders. In fact, the funders tend to be in over their heads and are in a ticking time bomb waiting for foreclosure. They entice these people into this type of bad situation by promissing cash back at closing (usually just a thousand or two dollars).
Here is my plan. When the people initially buy from me, I want to have them sign a clause that says they are allowed to sell the property or refinance me but they will not refinance me if their interest rate on the new money is above 12% including points, fees and other miscilaneous charges. Then, they will either refinance me by taking out a good loan (which is to their advantage and I don’t care, in fact I feel good about it) or they cannot refinance me at all.
Does this sound illegal, or does it sound like it can fly?
My thoughts are you wouldnt be able to control this, and you shouldnt be able to control this to the extent they can only use you, good intentions or not.
But, what about this? Maybe you add a clause in your option that says in the event they go to get new financing in order to excercise you have first right of refusal to meet or beat the financing for them. You could then wrap the underlying loan, and finance them yourself.
Another thing I have done is on My One L/O I have done (normally sell on contract for deed) is told the renters that if they came up with X amount of Dollars, during their option period I would owner finance for them.
Instead of capping it at 12% (or whatever), why not tie it to prime? That is, your penalty will kick in if the refi rate is prime-plus-X-percent. That way, if rates go through the roof, you’ll still be covered.
Re: Criminal…What do you think of this? - Posted by Daniel Lubell
Posted by Daniel Lubell on February 28, 2000 at 16:12:03:
Thank you to all for all of your suggestions. As Bud has alluded to, I do believe in the old mantra of "Pay me till you die!’ but I have also softened up a little bit in my old age. So, I really do not mind getting paid off on one of my lease options when it makes things better for the person that is paying me off.
I just resent it when I get paid off and the payor is getting screwed and the mortgage broker is raping and pillaging.
Your suggestions are all good ones, and it seems to me that the best way to handle this is some sort of prepayment penalty. Since I am dealing with a lease option, I cannot exactly call it a prepayment penalty. How does the following idea sound? It only kicks in in the event the buyer will pay more than 12% interest on a new loan and then only if the prime rate is below 12%. Here is an example of the propossed langauge:
The option price shall be $50,000 (or whatever) to be used as a basis in the event of a sale or refinance. However, in the event of a refinance at any time in which the annual percentage rate on a loan to purchase exceeds 12% and the prime rate is below 12%, the option price shall be adjusted upward to $55,000.00.
The leasee agrees to cooperate with the lease option seller and present all paperwork for their new loan.
Again, thank you all for your comments and let me know what you think of this new language.
Your proclivity to have people pay you forever is legendary. Your alternative is to buy a mortgage company or at least form an alliance with one. As Micheal has said you can add a prepayment penalty to the L/O. Of course you could increase the sales price to make it more difficult for these low lifes to fabricate the appraisals. Then you could discount the price if they went full term with you. You could even set up your own credit line with FNAC to buy your own notes that you finance.
I was discussing clauses to add in seconds that would make any prepayments apply to the junior lien first. The problem is that I can not unduly restrict their right to prepay a loan. You would have the similar problem if you tried to restrict from whom they could get a loan. Incentives and penalties are more likely to work better.
Dan:
I assume you allow your “buyers” to get into a home under some sort of lease purchase or lease with an option type program? Along with allowing them into the home and paying you rent the promise is there to these “buyers” that at some point in time in the future they can elect to excercise their option and complete the purchase of the home from you.
Invariably a purchaser who is “buying” under this type of scenario will want to fufill their purchase from you and obtain legal title to the property in their name. It seems to me that the Hard money lender or any lender for that matter is fufiling these “buyers” wishes.
While it may not be morally or ethically right how these lenders go about their business they are assisting these individuals in completing the purchase from you. If a buyer makes a decsion to borrow money at 16%, then that is THEIR decsion.
I don’t feel you can prevent one of your “buyers” from completing the purchase of your home simply because they must borrow funds at a no more than a prescrbed interest rate. What if another peanut farmer gets in the white house again and interest rates rise above 12%, would this mean that your “buyers” cannot complete the purchase of the home from you?
That may violate restraint of trade issues.
I hold many mortgages where I collect payments each month. If I get paid off then I have to “work” to invest that cash once again and lose the income that the mortgage generated to me.
It seems you are concerned about being paid off early on these lease purchase agreements whereby you lose the “spread” in income each month. Perhaps you can build some type of “pre payment penality” that would be triggered in the event the “buyers” choose to exercise their option to purchase earlier than 12 months, etc. This would have the same effect as a prepayment penality inserted in a mortgage loan made by a lender . It would discourage individuals from paying off their existing agreement until they had the most advantageous circusmstances.
Re: Time to play “Who wants to be a criminal?” - Posted by Glenn OH
Posted by Glenn OH on February 28, 2000 at 11:27:31:
I think the question here is: Are these payoff’s coming to avoid losing option money, or are they just the buyers trying to get their houses outright? If it is the former, then if you are really trying to be altruistic, then contacting them beforehand to offer support, and possibly alternatives to these brokers would be the best tactic.
As far as putting limits on interest rates, etc., I don’t think this is wise, because 20 years ago interest rates were well above 12%, and these are beyond your control.
Yeah right if you care so much why don’t you send your buyers to a lender / broker that will not take advantage of them? Who are you to decide what kind of loan is best for anyone but yourself?