credits toward principle on a lease option

5 Replies

I am trying to work a lease option deal where the tenant buyer gets $200 a month out of their monthly rent to go toward the purchase price of the home once they exercise the option. I have heard that a rent credit can only be fulfilled in the form of a seller concession and not to exceed 6%. However, there is already going to be a seller concession in the amount of $2500, so that the total credits to the buyer when including the $200 a month for a 2 year term would exceed 6%. 

The purchase price of the house is 220k with the monthly rent at $1500 and a $10k Option Fee being put down. 

I am wondering if I can increase the amount of the non refundable Earnest Money (option fee) by the total of $200 x 24 (months) making it a total of $14,800. $10k would be put down up front and the remaining amount would be paid in monthly installments. If the tenant buyer exercised the option to buy before 24 months was up, then the remaining amount due on the earnest money would become part of the total amount due for the purchase of the house. Technically I would be decreasing the rent amount by that $200 and the earnest money would be paid monthly with a separate check.

Assuming that there were copies made of all the checks that were going toward that earnest money (including the 10k up front and the $200 a month), is a lender going to be able to look at that and acknowledge it as having been paid and sufficing for down payment on a $220k purchase? 

Can you see any problems with this scenario? 

Thanks in advance

So if I state in the agreement that seller will pay up to 6% concessions, is there a way that I can structure it in an incremental fashion. I just wouldn't want to have to pay the whole 6% if the tenant buyer exercises the option 5 or 6 months down the road. I would want that 6 months to represent a portion of the 6% somehow.

I assume the buyer is moving in, making your arrangement a consumer financing contract. You'll be in violation of federal law doing that, search on BP for "seller credits" and "Dodd-Frank". 

You may pay by allowing seller concessions, but no payment may reduce the sale price.

You can't make any performance requirement of the optionee under any option contract.

Your theory of graduated credits is a "reversed step option". You must define the time required when the credit applies. It is an incentive for the optionee to wait.

The other remedy is using a "European Option" (nothing to do with Europe) which requires the optionee to exercise the option at the end of the term, providing a window for financing. 

Why not just lower the price and raise the rents in the beginning with a European Option approach? Also, make sure you use separate lease and option agreements, it's even better doing a lease first, wait and then do an option. A tactic to attempt in avoiding a disguised sale. The option price can be escrowed and the option becomes effective 30, 60, 90 days later. You're staying away from the initial intent of selling by not executing contracts at the same time. 

Consider too, a tenant's ability to pay before they obtain an option. It's better to wait on your money than to devise a poorly constructed option that bombs out with a tenant obtaining equity in a contract and having to foreclose under state laws. 

Your lease agreement could require the tenant to deposit funds in a savings account that you have no control over, they just show the deposits made, then they will have the funds to close. You're not financing anything do this, you can craft the requirement as a tenant reserve instead of more in lease deposits.  

In 10 days, there will be a course on L/O deals, just follow me! :)

Originally posted by @Brian Gibbons :

Folks that is post of the day! How to do options in Europe! 

Kidding @Bill Gulley

Seriously writing notes on that one!

 LOL, you can just contact me, no need for notes. Watch the market place forums too, it's the "Count Down To Launch" LOL.

There are several types of conventional options, the "full credit", "step up", "financed option" (actually 2 ways), "set up option" "declining credit option"  each having acceptable variations and the American Option (a favorite of the gurus) and the European Option described, both may employ aspects of the different types. 

There is plenty of room to be creative in options while staying compliant, having a deal that works without getting goosey about trying to devise spin off stuff. It's the basics and it's all been done before, just need an education.   :) 

PS. I guess I'll give snazzy names to the different types, can't have a "system" without a snazzy investor name now can we? :)