Dipping Your Toe Into the World of Seller Financing
If you are going to sign a lease/option contract with a prospective tenant buyer, you should go through the normal screening process used in any seller financed deal. That means credit reports, background checks, pay stubs, reference checks and any other due diligence that gives you an accurate profile of your prospective buyer. After all, you really want them to perform on the lease and exercise the option.
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Be firm, be fair: Some investors take advantage of the fact that they are not outright selling the property to a tenant buyer. They put clauses in the option document that make it near impossible for the buyer to exercise the option or even want to exercise the option. That is not fair!! Keep the lease portion 12-24 months in length, consider crediting some portion of the payment towards the option price, and make the option terms reasonable. A two year lease option with a balloon in 24 months is only destined to fail.
Work on the Exit Strategy Now: If you’ve done your due diligence and have a qualified tenant in place, start working on their credit with them right away. You can help them get to a mortgage faster by working with them from the start as opposed to when they are a year into the option. Banks are slow to move right now and getting a property to finance out is going to take time and effort. Might as well start now. Even if they don’t exercise the option, the process of helping to restore credit is a good thing, and will only save you time the next time you work with a lease option buyer. If you are planning to hold onto the contract, maintain good records of payment history so that if you do decide to sell the contract you have payment history during the lease period and after they have exercised their option.
I recommend and stress these action steps so if you are providing seller-financing, you have to only deal with an eviction process during the lease period for those that don’t perform. For those that do perform, you will create positive payment history which can lead to several positive exit strategies that benefit you and the buyer!