LEASE OPTION or LEASE PURCHASE?

Buying & Selling Real Estate
7yFollow

LEASE OPTION or LEASE PURCHASE?

Del Kelley
Engineer · Pensacola, FL · Member since 2009 · 67 posts · 22 votes

From speaking with a couple of mortgage brokers, the option fee cannot be used as "an acceptable source of borrower funds" as stated by HUD.


Could the the tenant / buyer sign a purchase contract with a non-refundable earnest money deposit? The reason I ask is that earnest money deposits can go towards the down payment. I'm trying to set the tenant up for success when they go to get financing. Please chime in if you have any success in getting the tenant / buyer to the closing table. 

0Reply
44 views

Most Popular Reply

Jenifer Levini
Attorney · Santa Cruz, CA · Member since 2015 · 345 posts · 358 votes
7y

Sometimes I read a bunch of non-lawyers trying to give each other legal advice and realize how dangerous this website really is! Jeez!
@Del Kelley, You sound like someone who is trying to get in on real estate deals without doing the required education to become a realtor, or the footwork to become a wholeseller... Trying to get people to pay you when you dont have even a slight understanding of contract law or how a real estate transaction works.

And, most likely the dozens of realtors in your neck of the woods who see your post here, will report you, for attempting to broker deals without a license. 

2Reply
See this reply in the discussion

17 Replies

Jump to latestLatest
  • Account Closed
    Specialist · Paradise Valley, AZ · Member since 2018 · 3k+ posts · 2k+ votes
    7y
    Originally posted by @Del Kelley:

    From speaking with a couple of mortgage brokers, the option fee cannot be used as "an acceptable source of borrower funds" as stated by HUD.


    Could the the tenant / buyer sign a purchase contract with a non-refundable earnest money deposit? The reason I ask is that earnest money deposits can go towards the down payment. I'm trying to set the tenant up for success when they go to get financing. Please chime in if you have any success in getting the tenant / buyer to the closing table. 

     I sell properties using Lease Options with a nonrefundable option fee. I have not had a problem with the buyer's option fee being applied as the down payment. I'm a little confused as to what the issue may be.

    1Reply
  • Del Kelley
    OP
    Engineer · Pensacola, FL · Member since 2009 · 67 posts · 22 votes
    7y

    @Mike M 
    ... and I'm a little dubious of your claim. How do you state your option fee on the HUD-1? It baffles me. We're talking FHA guideline. Please point me somewhere so I can validate your claim. Not that I don't believe you, but the lenders I deal with say the option fee cannot be counted towards the down weak.

    0Reply
  • Vince Mayer
    Wholesaler · Arnold, MO · Member since 2013 · 348 posts · 183 votes
    7y

    @Del Kelley Run everything from start to finish through a Mortgage Originator. You show the option fee as an option fee on the HUD. A 3.5% option fee would satisfy an FHA requirement for a 3,5% down payment.

    1Reply
  • Wendy PattonBusiness Member
    Real Estate Consultant · Clarkston, MI · Member since 2009 · 864 posts · 350 votes
    7y

    I like the idea of a non refundable earnest deposit - talk to a lender (maybe multiple lenders) and find out what they need to make it work on their end.  Usually i work with lenders who work with lots of investors or are very familiar with how to use these funds (it might require a redo of the sales contract and option fee ..... )  be creative to figure out a solution -  

    Michigan Real Estate Investors535 Reviews
    WebsiteView Page
    0Reply
  • Account Closed
    Specialist · Paradise Valley, AZ · Member since 2018 · 3k+ posts · 2k+ votes
    7y
    Originally posted by @Del Kelley:

    From speaking with a couple of mortgage brokers, the option fee cannot be used as "an acceptable source of borrower funds" as stated by HUD.


    Could the the tenant / buyer sign a purchase contract with a non-refundable earnest money deposit? The reason I ask is that earnest money deposits can go towards the down payment. I'm trying to set the tenant up for success when they go to get financing. Please chime in if you have any success in getting the tenant / buyer to the closing table. 

     Maybe @Chris Mason can give you guidance. I'm not a loan officer. I work with a mortgage broker that covers Arizona and Texas and I just know it hasn't been a problem. I'm not sure why it would be a problem in Florida. Maybe your contract needs to be reviewed by a real estate attorney or an escrow company.

    0Reply
  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    7y
    Originally posted by @Account Closed:
    Originally posted by @Del Kelley:

    From speaking with a couple of mortgage brokers, the option fee cannot be used as "an acceptable source of borrower funds" as stated by HUD.


    Could the the tenant / buyer sign a purchase contract with a non-refundable earnest money deposit? The reason I ask is that earnest money deposits can go towards the down payment. I'm trying to set the tenant up for success when they go to get financing. Please chime in if you have any success in getting the tenant / buyer to the closing table. 

     Maybe @Chris Mason can give you guidance. I'm not a loan officer. I work with a mortgage broker that covers Arizona and Texas and I just know it hasn't been a problem. I'm not sure why it would be a problem in Florida. Maybe your contract needs to be reviewed by a real estate attorney or an escrow company.

     There aren't really sufficient details to answer. 

    I'd suggest formally entering escrow with that EMD with an appropriate (12+ month) COE.

    0Reply
  • Del Kelley
    OP
    Engineer · Pensacola, FL · Member since 2009 · 67 posts · 22 votes
    7y

    @Chris Mason. Is it possible that the EMD be released to the seller once it's given to the title company? It's non-refundable anyway.

    My over arching goal is to consult the seller how to make the option fee. I would get a consultant fee for showing the seller how to do a lease option.

    @Wendy Patton. That is what I will do today. I am going in a different direction because I want to focus on being a consultant. I may drop you a line.

    0Reply
  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    7y

    @Del Kelley, I still really have no idea what you are doing and what your role in the transaction is.

    But, no, earnest money is not released until escrow is closed. 

    0Reply
  • Del Kelley
    OP
    Engineer · Pensacola, FL · Member since 2009 · 67 posts · 22 votes
    7y

    @Chris Mason - I want to be a consultant. This does not mean I represent anyone as an agent.

    I want to give the home seller advice for how to get the most money upfront for a lease purchase transaction. I would get paid as a consultant. So I would not receive the option fee or earnest money.

    My dilemma was how to best give the up-front money from the "tenant buyer" to seller and have it count as a down payment if the tenant exercises the option to buy. My goal is to make sure that the seller realizes the non-refundable money upfront and still have this money count as a down payment.

    This is the scenario I'm trying to answer and still sleep at night.  

    0Reply
  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    7y
    Originally posted by @Del Kelley:

    @Chris Mason - I want to be a consultant. This does not mean I represent anyone as an agent.

    I want to give the home seller advice for how to get the most money upfront for a lease purchase transaction. I would get paid as a consultant. So I would not receive the option fee or earnest money.

    My dilemma was how to best give the up-front money from the "tenant buyer" to seller and have it count as a down payment if the tenant exercises the option to buy. My goal is to make sure that the seller realizes the non-refundable money upfront and still have this money count as a down payment.

    This is the scenario I'm trying to answer and still sleep at night.  

     Ah, got it.

    Here's the Fannie guideline on rent to own.

    In theory, according to my reading of it, you could call the extra chunk of change "upfront rent" and then it might count towards down payment. Again, that's according to my reading of the guideline, and an appraisal would have to support it per the guideline. Not all lenders will go for that interpretation. 

    0Reply
  • Jenifer Levini
    Attorney · Santa Cruz, CA · Member since 2015 · 345 posts · 358 votes
    7y

    Sometimes I read a bunch of non-lawyers trying to give each other legal advice and realize how dangerous this website really is! Jeez!
    @Del Kelley, You sound like someone who is trying to get in on real estate deals without doing the required education to become a realtor, or the footwork to become a wholeseller... Trying to get people to pay you when you dont have even a slight understanding of contract law or how a real estate transaction works.

    And, most likely the dozens of realtors in your neck of the woods who see your post here, will report you, for attempting to broker deals without a license. 

    2Reply
  • Del Kelley
    OP
    Engineer · Pensacola, FL · Member since 2009 · 67 posts · 22 votes
    7y

    @Jenifer Levini - I'm amazed you're an attorney and I don't appreciate your veiled threat about other realtors reporting me. I was simply asking a question. Seeking knowledge about how best to insure the buyers non-refundable deposit can be put towards the down payment if possible.


    So what am I that prompts the lawyer to conclude I represent the seller? I give advice to the home seller on all the steps it takes to complete a lease and an option to buy. I do not pretend to be a lawyer and therefore tell the seller they need a lawyer to go over the contracts to see if my contracts need to be modified or use whatever the lawyer deems appropriate for the lease / option transaction.

    I do not in anyway shape or form speak on behalf of the seller. The seller speaks with the tenant who wants to lease and then possibly buy the sellers home. The seller does everything in the transaction. They do the marketing, they screen the tenant (well, the mortgage broker really handles this), they negotiate the terms of their transaction and then they get a lawyer or title company to close if the tenant exercises the option to buy.

    Trust me Jennifer when I tell you this. Realtors are not huge fans of investors and all of my agreements have been check over by my attorney because I have to protect myself. 

    As an investor, I use to make 5-10k from a lease option transaction. The whole reason I wanted to teach the seller what was taught me is because I want to the seller to make that money.  I like to teach and I want to get paid for it sure, but I believe I bring value to both the home seller and the tenant who needs time to repair their credit. Just don't make the mistake that just because the seller is paying me for my opinion that somehow I am in anyway part of the transaction. 


    Let me say a word or two about decorum, Jennifer. Maybe if you seek out the better angels in all of us then you won't be quick to accuse me of a crime for heavens sake. I take offense to that as a gentleman who only wants to help not hurt.

    0Reply
  • Alex Jones
    Rental Property Investor · Rochester, NY · Member since 2013 · 162 posts · 127 votes
    7y

    @Chris Mason

    Thanks you for sharing the link and it is very helpful for me.

    Alex

    1Reply
  • Rob Duke
    Real Estate Agent · Pacific Palisades, CA · Member since 2018 · 43 posts · 14 votes
    7y

    I'm confused why the seller would not just go to a Real Estate attorney for everything? Are the RE attorneys unwilling to bend the rules or simply not informed about how to set up these deals? 

    0Reply
  • Del Kelley
    OP
    Engineer · Pensacola, FL · Member since 2009 · 67 posts · 22 votes
    7y

    @Rob Duke - No one is suggesting breaking the rules. I want to get into consulting.
    Any legal question would go to an attorney. 
    The reason for this thread concerned the non-refundable money a "tenant buyer" would put down and how best to apply towards the down payment. I now have the answer. I should have just asked a real estate attorney in my neck of the woods. However, this thread could help others. 

    Lease Options are usually a tool not used, but done correctly can benefit both the seller and the tenant who needs time to clean up their credit. At the end of the lease, the tenant could exercise their option to buy and close with a title company or attorney's office who handles closing. Each state is different and I am not an attorney. However, I can advice the seller where to go to get expert advice on legal issues.

    My real value to the home seller comes from marketing the property and I have a whole process for that.

    And I hope you do realize that people other than attorneys and realtors can engage in real estate transaction or as consultants as long as they don't represent the seller or buyer as either agent or attorney. Investors come to mind. 

    1Reply
  • Rob Duke
    Real Estate Agent · Pacific Palisades, CA · Member since 2018 · 43 posts · 14 votes
    7y

    OK, that clears it up for me, thanks for the reply and good luck with your endeavors. 

    0Reply
  • Shiloh LundahlPro Member
    Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes
    7y

    We have done several (coming up on 40) lease options in the last 2 1/2 years and we do not apply any of the option fee towards a down payment. If the individual in the property stops paying and we go to evict them, I do not want them saying that they have any equitable right to the property. .

    The option fee is just that, a fee to purchase an option to purchase the house for a specified period of time for a specific price. We charge $3900 for the option fee for most of our properties that are below 200k.  If they come in with a larger option deposit then we just lower the contracted strike price, or the agreed upon price that they can purchase the house. But none of that money, nor the rent, goes towards the purchase of the property. This is much cleaner and it doesn’t violate any Dodd Frank legislation. 

    480-206-1209Podcast Guest on Show #287
    1Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free