Rent credits can be against either the purchase price or the down payment. As the seller we prefer them against the sales price. We can adjust the sales price at the beginning. Lenders have a problem with down payment credits. First they like to see them as separate checks. Second, they like to see them above and beyond the FMV of rent for the property.
While the 20% is a normal figure for a conventional down payment, in todays world a decent mortgage broker can work with far less. The T/B lease should be on a yearly basis. Renegotiate for the second year if needed. How long you help him depends somewhat on the master lease and how fast you want your money. At some point the T/B must put up or move on, leaving his option money behind.
What is the least expensive way to control a property other than option contract or lease/option both of which require some cash upfront most of the time?
If you find a seller or property owner that needs real help you can enter into a “guaranteed” lease with that property owner. You provide you management expertise, know how, etc. to make certain that each and every month a negotiated rent amount is paid. You will “guarantee” no vacany’s and no minor maintenace headaches to the property owner.
In exchange for you providing this service (no minor fix up problems, unpaid rent or vacany’s, ec.) you ask for a below market rental amount. Along with the below market rent you also ask for a long term option with the purchase price set today.
You now effectively control the property and have a long term rental agreement in place at a below market rental amount. You can now go out rent the property to an occcpant who will pay FULL market rent and perhaps also would like to purchase some day.
What you have created if you have done you #'s correctly is CASH flow from the sandwich lease position and also the potential for future sale of the property with you riding the appreciation wave.
In lieu of cash you are providing your expetise. Some sellers may insist on cash as well. This cash can be offset in part by the potential future buyer if you give them an option to purchase.
In any event this is a wonderful way ot control property without ownjning it.
Re: Try a Sandwich lease along with an option - Posted by Erskine
Posted by Erskine on December 08, 1999 at 06:53:30:
If the T/B has made on time payments and is now ready to make application to purchase the home, what type of dollar amount credit do you look for now that the potential buyer is ready to go? For example, the T/B made all payments on time and their credit is much improved but due to the rent credits the amount now accumulated it is far less than, say, 20%, what occurs then? Should the rent credits be large enough to make sure that at least 20% credits have occured even if it mean having this occur over two to three years done with the T/B right to renew his lease?
Erskine:
This post was a response to the question of how to control property with as little outlay of funds as possible. It was geared to address a way to CONTROL property using mostly your managment expertise and not outlaying a lot of money for a normal option.
As far as your concerns go:
We typically like to see a mininum of 10% credited towards the purchase price of a home for the potential buyer who has been leasing a home for a period of time and now wishes to purchase it. The amount of monthly Credits are negotiable between the parties. I have seen where the entire rental payment is credited and then I have seen it where as little as $50.00 is credited.
From a note investors perspective we will be looking at WHAT AMOUNT of rent is being paid and then WHAT will be the prospective mortgage payment amount. If the potential buyer has demostrated that he / she can make a rental payment that is similar to what their mortgage payment amount would be then we would be more comfortable with that parties capability.