I am trying to do cooperative lease option on a property. The owner is asking for sale price that is at least $20K above the market price. I can make it up by applying 50% of the rent money towards the sale price (down payment).
Is there any limit to the amount that will applied towards sale price on a monthly basis in a cooperative lease option purchase? Can we apply 50% of the rent or more towards the mortgage/ down payment?
The other thing I can do is increase the lease term from 2 years to 3 years to make for the higher price...
Any suggestions are greatly appreciated.
You can put any price as a purchase price on a lease option as long as both parties agree to the price. However if the property wont appraise when they do want to buy the house there will be an issue. The new lender wont lend more than the appraisal value. You can do a 2 or 3 year lease option. I usually only give my tenant buyers 10% of the monthly rent as a rent credit.
The biggest problem I see with this is that if your exit strategy from the lease option is to actually buy the house or sell to somebody else, you're going to need it to appraise 20K higher than what it's worth today to get a loan. That means quite a bit of repairs and/or appreciation. The latter is not likely to occur over the next 2-3 years, but depends on the actual price.
There is no limit to the amount of a payment that can be applied to what, that is all decided by the agreement that you come up with with the seller. This structure sounds like it will lend itself towards a default which will result in the seller keeping all the cash and kicking the "buyer" out.
You can put any price as a purchase price on a lease option as long as both parties agree to the price. However if the property wont appraise when they do want to buy the house there will be an issue. The new lender wont lend more than the appraisal value. You can do a 2 or 3 year lease option. I usually only give my tenant buyers 10% of the monthly rent as a rent credit.
I don't want to be rude, but you have no idea what you are doing and if the buyer has a brain and an attorney, you'll be in deep stuff! Or should be....
Options do have a valuation process which is beyond the scope of this site. It takes into account the value over time the option is let based on the value of the property. So you don't just sucker someone into anything you feel like charging because they are dumb enough to agree to it.
Options set too high by credits paid with rents will most likely be disqualified. ONLY those amounts paid in excess of fair market rents will be credited toward the down payment for lending purposes and establish the LTV for the required future financing. This amount, FMV of rents is totally unknown at the time of contracting as it is stated in the appraisal for the future loan. So your credits need to be near the FMV of rents.
To make them clear and creditable, options need to be seperate agreements to any lease agreement,
A contract that applies additional rents under a lease agreement that fails to meet the FMV of rents is totally disallowed by HUD and the secondary market and usually is nothing more than a scam waiting to be exposed. Since this FMV is an unknown, you can't possibly meet the requirements as agreed, without pure luck.
A conservative option price for a 1 to 3 year term will usually be 10 % of the purchase price. This is a generally accepted valuation between private parties and should keep you out of trouble, so long as the financing of the option price exceeds the fiair market rents.
There are tons of post about this here on BP!
Good luck.....
Lokesh,
Great question. I sell a lot of lease option deals and I get my buyers asking for a huge credit. Unfortunately, if you are crediting it toward a down payment, you will be at the mercy of a future underwriter. They will only credit anything above the current market rent according to the appraiser.
If you are crediting toward the purchase price, you can be a little more liberal.
I credit 20% of every on time payment. I give 100% of the downpayment. If they don't have the entire downpayment, I will take payments on it at 18% and credit the entire thing.
Good luck!!
Ron, what is your success ratio?
If ya hold the contract long enough, you could work out 30 or 40 %....
But the option price is usually cerdited to the sale price, your option price can be determined, it is not arbitrary.
And the option price can be financed as well, the best way to go for the optionor.
Bill Gulley and Rob Gillespie, it appears to me that Lokesh W. is the buyer in the described transaction, not the seller.
Lokesh, is that correct?
Ann Bellamy, you appear to be correct on mys second reading! It was very late for me last night when I posted.
Anyone correct me if I'm wrong but Cooperative, Sandwich, Pass-Through leases are simply leases that allows sub-letting that may or may not involve an option. My impression was that the OP would be a leasee with an option and perhaps later the pass it along.
I don't know who the guru was that exposed the lease-option secrets but IMO they sure messed up a good thing suggesting wrapping a lease and purchase credits in one contract!
I know that there are honest and well meaning investors that attempt to buy and sell using such strategies and I also know there are some (many) that have no intention of making a successful transaction in the future. Buyers should run from any Rent-To-Own signs IMO.
Much has been written here on BP about lease-options...
@lokesh I may be misunderstanding the first part of your comment, but if the owner is asking for $20k over value....what exactly are you trying to work here? I don't guess I see the potential "deal".
In regards to your finance/numbers question, here is how that works.
The option fee, or money the tenant/buyer or assignee pays at move in, would apply towards the down payment at the time of close. There is no cap on what the buyer can put down of course. We usually set the assignment fee around 3% or a tad higher, as most of our clients go FHA, which is currently at3.5% down.
As far as rent credits, YES, there is a limit to that. First, our documents don't actually state rent credit, rather, a seller concession at the time of close. We just have a set amount in the contract depending on the price of the house, such as $3600 etc.
IF you mention rent credit in the OTP, then the lender will typically have to look at rent rates for the area and that is where you get into the rent credit having to be above rent rate etc.
ALSO, the rent credit, or seller concession as we have it, CAN NOT be applied to the down payment! The lender will not allow it. It has to be applied to closing costs.
As far as the cap on the seller concession it is 6%, although some lenders, I believe mainly for conventional, are now at 3%.
So you can't just arbitrarily give a concession of 10% or whatever.
I hope that info helps!
Michael Siekerka, Monica Breckenridge, Bill Gulley, Rob Gillespie, Ann Bellamy, John Jackson
Thanks for all the replies. This house will sell for 185K - 190K if I were to get a bank mortgage closing in 90 days. One of the houses in that area sold for 165K in Feb 2012. In Wisconsin, houses sell for less when there is heavy snow. I can see that the house that sold for 165K must have had an offer in Oct - Dec 2011 timeframe.
The seller listed this at 217K and said the lowest he can accept is 205K for the 2-year option. I will be asking for 190K. The max I am willing to offer 195K (i.e. the seller gets 195K) for a 2-year option. My buyer will pay around $200K (since this will include my coop lease option fee of 4K - 6K). If my tenant/ buyer can get enough money credited towards the down/ payment, then this can still be a deal i.e. at the end of 2-year period, my tenant/buyer can still get a bank mortgage.
The seller wants some kind of down payment too (ie. he wants some money for his pocket). Since I am planning assign my interest in this property for a fee, I will have to add his down payment (I am thinking of offering him 6K) and my assignment fee (4k - 6K) and find a buyer who can pay a total down payment of around 10K - 12K.
If the seller insists 205K, then I will request a 3 or 4 year lease. I think by 3 - 4 year, the tenant buyer can accumulate enough credit towards down payment to get a mortgage on the property.
The market rent is around $1200 - $1300. I can ask the tenant buyer to pay $1800 rent and have $600 credited towards the down payment/ mortgage.
2-Year option
-----------------
Max Purchase Price: around $200K (including my option assignment fee)
Downpayment: 10-12K (seller gets $6 and I get $4 - $6K)
Monthly rent: $1800 ($600 credited towards down payment/ mortgage)
3 or 4 year option
--------------------
Max Purchase Price: around 210K (including my option assignment fee)
Downpayment: 10-12K (seller gets $6 and I get $4 - $6K)
Monthly rent: $1800 ($600 credited towards down payment/ mortgage)
If the seller does not agree to this, then I will walk away from this deal. Maybe followup after a few months if the property is still in the market.
Any suggestions are greatly appreciated.
Lokesh W. I always try to work as simple as possible...it normally takes me all of 3 minutes to put the figures together for a seller. So..my first advice is to keep it simple...it either works, or it doesn't. I say that, only to let you know that you want to help the seller, but the seller has to be willing to be helped...(is that proper English?)
So, first...wipe the slate clean...let's start off here assuming this seller contacted me.
He says he wants $205k..Great..whatever. Let's me see if I think it will appraise. I look at price per sf in that area, listed houses that are not FC'd and I see that it is probably only worth $185k. I e-mail or cal the seller back. Sorry, I'd love to help, but the comps don't support what you need. Sorry, wish I could help..click...
No need to try to crunch major numbers that are totally made up and arbitrary anyway. If the house won't appraise, and you look to make it a 3 or 4 year deal, the odds are the buyer won't even purchase anyway. NOW, if the #'s were tight, and I felt like we just needed a little bit more than a standard 1 year deal, then I might be willing to look at whether a 2 year deal is worth it, but what I don't want to do is give the seller false hopes and screw the buyer into a house that will not appraise so I can make $4k just to support my crack habit.
But..let's assume I look at the #'s and the owner wants $205 and I think it should appraise for the $205-$210k range.. great..let's make it happen.
Here's what I do...
IF I feel I can do it, I raise the price the owner wants by approx. what I am going to make...which, I can't ALWAYS do, but I try if I feel there is room...but let's keep it simple....
Option Price: $210,900
- Assignment fee $7500
= $203,400
Rent $1695 a month (I might go up some if the owner's payments are more) Rent credit $300 a month x 12 months = $3600 (although in our docs it just shows a seller concession of $3600..no reference to a rent credit)
$203,400 - $3600 = $199,800 and I would usually give the owner part of the assignment fee..say..$1,000 or you may want to go $1500. Up to you. So add the $1k and he gets $200,800 plus whatever cash flow.
The buyer at finance will have $7500 down which actually is a hair above what FHA requires and will have $3600 towards closing costs.
I use my Seller Price Sheet to complete and send to the seller via e-mail so it's all laid out.
If the seller whines about wanting $5k down or something...well...I move on...I have too much going on to try to get $15k down or whatever on a $200k house so the seller can get a big down payment.
You want to help, and you can be willing to bend some, but if you start bending too much...well..you'll end up getting...bent over...HA!! WHEE!!!
I put a video together showing the seller price sheet a while back. It's on YouTube I think. Maybe it will help.
Lokesh, I don't see this as a deal anyway you want to spin it. You're looking at moving a 200K property with trying to make 5% over a two year or so period, it's not worth the brain damage IMO.
For that kind of money you need to be looking at flipping deals on a 50 to 75K property. I walked away from anything I couldn't get at least 5K on within 60 days.
With an option you have no legal obligation to buy or close. But if you intend to be "in the business" in your area, you have a moral obligation as well as a reputable aspect to not leave sellers hanging which means you need to carry through with what you purpose.
The property was listed at 217K and did not sell! Now, the seller is motivated at 205K and you might get it at your 198K or whatever price. So, the deal goes down at say 200K for you. You are basically trading places with the seller trying to market the property where Realtor could not sell it. You can provide seller concessions, finance an option price or do all kinds of dances for two years to get maybe 4 to 7k. And if Murphy pops his head up on a 200K property that can easily be gone and you'll be spinning your wheels for nothing.
You also need to examine your own skills and your ability to flip a sow's ear into a silk purse. Sounds like you are kinda stumbling in setting up the deal and making the offer, do you really want to hang your reputation out at risks on 200K for that kind of money? I wouldn't.
This deal would have to cut at least 15 to 20K for me to touch it and it's not there. If you want to make 3 to 6%, get a real estate license and that will have alot less headaches than all the dancing suggested here.
Just IMO, but Good Luck!
Thanks for the comments...
I have done wholesales and short sales before. This will be my first lease option deal. Irrespective of what the seller says about his bottom line of 205K, I want to get out and make an offer that makes sense to me.
THis seller has lived there since 1999 (purchased at 148K) and has never had job loss (no income loss). He said he has been paying mortgage on time and has a good rate of interest. I know that he owes much less than 205K to the bank
I think this will be a deal at 190K (which includes my assignment fee) for 2 years. The city assessment in 2011 is at 193K and in 2012 at 179K (pretty sharp decrease) while comparables are 175K - 190K.
I can talk to the owner about the low city assessment that prospective tenant/ buyers will look at...
2-Year option with the right to extend up to 1 year.
------------------------------------------------------
Max Purchase Price: around $190K (including my option assignment fee)
Downpayment: 10K (seller gets $5 and I get $5K)
Monthly rent: $1700 ($500 credited towards down payment/ mortgage)
If my offer is accepted, then I will speak with my attorney about allowable rent credit or seller concessions and also review my paperwork.
I will sit on this for a few days and see if I change my mind and then make the offer...
Unless your attorney is also a loan officer, he/she won't know anything about the allowable concessions, but just keep the concessions below 6% of the Option Price.
Keep us posted on it!
The owner verbally accepted the offer of $192,500, which includes $5500 as my option fee. On Monday, he will review the offer with his attorney.
btw, my RE Attorney is pretty experienced and well reputed in this area. He said, that you write even 100% of the rent as rent credit towards mortgage. Anyways, I don't plan on attempting 100% rent credit unless, I plan on buying the house for myself...
Options do have a valuation process which is beyond the scope of this site. It takes into account the value over time the option is let based on the value of the property. So you don't just sucker someone into anything you feel like charging because they are dumb enough to agree to it.
Options set too high by credits paid with rents will most likely be disqualified. ONLY those amounts paid in excess of fair market rents will be credited toward the down payment for lending purposes and establish the LTV for the required future financing. This amount, FMV of rents is totally unknown at the time of contracting as it is stated in the appraisal for the future loan. So your credits need to be near the FMV of rents.
To make them clear and creditable, options need to be seperate agreements to any lease agreement,
A contract that applies additional rents under a lease agreement that fails to meet the FMV of rents is totally disallowed by HUD and the secondary market and usually is nothing more than a scam waiting to be exposed. Since this FMV is an unknown, you can't possibly meet the requirements as agreed, without pure luck.
A conservative option price for a 1 to 3 year term will usually be 10 % of the purchase price. This is a generally accepted valuation between private parties and should keep you out of trouble, so long as the financing of the option price exceeds the fiair market rents.
There are tons of post about this here on BP!
Good luck.....
Read it agAin, maybe a second time, do you really think you have a clue as to what you're diing? Any attirneys here?
Lokesh W. Not to be picky here...but if you offer 100% rent credits, the lender won't allow it...
your attorney may be fine with traffic tickets..but not with financing lease options.
Please re-read the post above from myself, as well as Bill.
This is what we do...we're just trying to help.
I'm not a lease option guy, so maybe I'm just looking at this wrong. When he exercises the option, why can't he write up a new contract with a lower purchase price reflecting the rent credit? Isn't that effectively what you are doing when you give a rent credit - lowering the price?
What the attorney said is just an FYI since we were discussing this earlier.... FOr this contract, we have $200 rent credit.
Yes, we could do that as well but when I assign, it is better to have all the agreements in writing at the time we sign the lease, which is now...
Lokesh W. is right on the paperwork point. If you rewrite the docs, you are looking to create a mess. If you write a sales contract to just reflect a lower sales price, which you could do, then the buyer now has to start from scratch on the 3.5% down and closing costs. Far better to structure it properly from the get go. No prob on the $200 rent credit, but I'd highly recommend to anyone doing LO's that your Option not refer to "rent credits" rather, just a total seller concession.
I agree that LO needs to be written properly from the git go, but raising a sale price to kick back funds through a seller concession is not really the way to begin. If that becomes your practice, which is illegal and viewed as mortgage fraud in my area (maybe yours too) you will be limited at that 6% range. It can be a thin line and if you do enough business for your to be known in your area, it can impact your reputation, IMO.
Write a seperate option contract! Set your option price and finance the option price if you must. 100% of the option price can be counted so long as the rent is at FMR levels. There is no 6% limitation, the buyer can continue paying any amount, lump sums or what ever over the term if it is properly written.
You can also have amounts paid in excess of the option price that can be a down payment. If you begin with a proper option you can do adapt it to any buyer, one with limited funds or one who puts 25% in the deal.
Further up the thread John mentioned keeping the deal at or below 6% of the Option price, that will work for buyers doing FHA and I hit it with a vote too......
But it's 6% of the sale price, not option price, so we both missed that kinda.
Manipulating a sale price can bring on problems, just wait until it doesn't appraise out. A seperate option is cash paid.....period without any connection to the sale price and you can always pay costs except pre-paids....
One of the prospective tenant buyers visited the property and asked for higher rent credit (or seller concession). She said that she knows some people who are getting 50% of the rent credit towards the mortgage. I believe that there are some sellers and investors offering much higher rent credits. Another person told me on phone also and did not even visit the property because of low rent credit of $200 that I am offering. I think I will ask the lawyer also to put higher seller concession (work this as seller concession instead of rent credit). I think seller concession may be ok because it is a discount that the seller is offering.
One of the sellers wants to come on board with lease option but his bank does not allow that because the loan and interest rate offered was only for owner occupied homes and will not be the same if the property is rented out for lease option.
In another situation, the owner has a lot of equity but does not want to sell below market. He says he can only rent 2 years because of the capital gains tax break he will get on that home if rented for less than 2 years. Is there any solution for this? I think this is ok as I can try to find a tenant buyer who can close after 1 year.
Any suggestions?
Lokesh W. double check the previous info I posted about rent credits/seller concessions. The lenders have a cap on them.
Realize you are working with people with credit issues..this means they really can't negotiate. It is what it is. I can try to barter with Gulfstream all I want about the G5, but it doesn't matter, because I can't qualify for the $8MM plane....keep the concessions below 6%of the price. If the other seller needs to cash out within 2 years, that's OK, you just have to make sure your buyer can qualify within 24 months.
That is a whole other topic...BK's FC's, tax liens, SE...
You neeed to educate your buyer about that 50% of rents, her lender will not take that and she will be short of what she thinks she will need at loan time. This is part of the scam for preditory transactions.
You don't need escrow for an option really, since it's paying for the right to purchase and the buyer is not in title. But you could do so if the payments are financed, ask your escrow agent if they would do that.....probably not for a long term contract.....I never did.