I have an interesting situation that I could use some advice for. My wife and I found a house for our family and used a hard money lender, that we have done some business with in the past, to fund the purchase so that we could close quickly and acquire the property below market value.
We have a 1 year Rent to Own Contract that if not executed by November will charge $5,000 for 6 months and then another $5,000 for 6 months.
Conventional lending is an issue because I have some old credit issues from the great recession and my credit will not be cleared until November. I also recently had an employment change as I Conceded my 50% ownership share of a general contracting firm.
We brought $40,000 dollars to the table for the Rent to Own Closing of which $10,000 went to the lender. After closing costs we have $23,000 left in the deal that can look like a down payment in a sales agreement as well as enough equity to roll in closing costs.
The payoff is $198,000 and the appraised price is $257,000.
I would love your advice on this!!
You haven't provided any more details regarding terms for the hard money lender. This is relevant. When do they need their money back, what is their rate, etc.
I don't know why you're in such a hurry on this, either, if you're credit is possibly getting back in order this coming November? Patience
The Rent to Own contract was for 1 year ending in November 2019 with each 6 month extension subtracting $5,000 from my cash down payment.
@Jim Goebel They will deduct another $5000 from the equity at the beginning of November and the another $5000 in 6 months.
I'm confused. 'Subtracting from equity' ? As in, you pay the lender?
Do you not have to pay an ongoing monthly amount? If so, what is it, and what is your APR on your borrowed balance?
Some terminology here seems off.
@Jim Goebel The property is in the lenders name. The purchase price of the house was $212,000. We brought $40,000 to the closing table. After closing costs and $10,000 finance charge to the lender we have about $23,000 left in the deal. We pay rent of $1,830 per month which includes Taxes and Insurance. About $100 of that goes toward the principle monthly. I am not in my office so I will have to get back to you on the interest rate.
The house appraised for $256,000 and I believe the payoff is around $190,000.
The rent to own contract stipulates that if the house is not purchased from the Lender/Owner by the beginning of November the Lender/Owner will deduct another $5,000 from our approximately $23,000 of down payment. (Increasing payoff price to approximately $195,000.) After six months another $5,000 will be deducted from our deposit and or added to the payoff($200,000).
I have an Agreement of Sale that reflects a purchase price to include down payment and closing costs using $23,000 down payment and seller's assist to cover closing costs.
Might be more confusing now!! Ha Ha
Alright. A few things. I just 'backed' into what your effective interest rate would be if you were to be on a 30year fixed. It's 11.3%. Yikes. I don't want to pile on to your credit situation or trying to be a jerk, but my observation is a few things:
First, I think you need to really know your numbers and find a way to get some financial literacy to be able to communicate relevant information here a bit more clearly.
Second, obviously - fix your credit. That goes without saying but these terms are VERY VERY bad for you. At your >$1800 payment (rent), getting only $100 in principal a month is really really bad. It's almost like, you're paying at an 11.3% rate, which gets you a huge payment, but then, on top of that, you aren't even building equity at the rate that is in line with that horrible rate (even worse, basically).
Of course, it sounds like you're working with a private lender, and it's a free market. They clearly either needed to be compensated for risk, and/or they are being very, very opportunistic, relative to what a competitive lending environment might offer/provide.
I just went back and re-read your original post, and now I see how 'hard' hard money is. I hadn't realized this was a hard money situation. I'd say, honestly.... Get your credit back and repaired ASAP. This is a really, really bad lending situation for you currently. I'd almost think it's worth than pure renting, but some of that will depend on who can initiate a sale of the property. If you can do that, I'd be inclined to put the house on the market to test your theory of value. If you can cash out equity in the house, partly to get out from this financing situation and get some cash, I'd be inclined to do it.
correction: worse than pure renting. I'd think this is worse than renting, unless you're really in an appreciating property and you can exercise the option to sell anytime.
@Jim GoebelThanks for the information. The intention was to be extremely short term but my circumstances changed. My credit will be clear of a blemish in November but not likely before the next installment! Thanks again!
@Troy Nonnemacher Thanks for clarifying. Have you called around to local banks /credit unions that have more flexibility on the credit issue? Possibly something you can start now and close in the end of Oct, that's a fair amount of time. I've had some credit issues in the past and the local banks held the loan "in-house", so had more flexibility. The fact that it's about to drop off hopefully means it wouldn't be too much of an issue.
If you’re not going to be able to purchase by November...SELL...
You’re saying you are just about break even today if you sell after paying closing costs/realtor fees. If they take $5k in November you’ll be $5k upside down before the additional loan fees you’re going to incur with the new lender.
It SEEMS like you’re paying at least a couple hundred over fair rent already.