So I've been reading up on L/O (lease-options) and I was getting pretty revved up because they sounded like a great way to purchase a home and cash flow with out having to pay so much money upfront.
However when talking to a mortgage lender today who about credit repair he in a very supportive way that what I was venturing to do posed many challenges.
1. He said that essentially I'm looking for a unicorn tenant-buyer
I told him that I'm looking for tenants that have just had one bad event that was out of their control happen and now they're credit is ruined and they're looking for a way to repair it and move on with their lives. He said that essentially I'm looking for the best of the worst candidates because a lot of people have bad credit because they're bad with money not because of one unfortunate circumstance.
2. He said that many people with credit scores of around 697 frequently get denied mortgages. Even though for FHA loan financing all you need is a 640.
He says that he sees that all the time. He said that a lot of what lenders are looking for is cash reserves and that most tenant-buyers don't have that. So even if they do have a good credit score the fact that they don't have money saved is why they're get denied financing.
This man was really nice and wished me the best. But he was very skeptical and I think he posed some valid points. I just wanted to post some of the things we talked about and see what you who do L/O have to say about that.
How do you think L/O fair in today's market? How are L/O working for you now vs any other time? How do you overcome these 2 obstacles, if you do overcome them? Do you you pull in tenant-buyers who already have good credit? If so for what reasons? This seems to right now be my biggest hang-up about sandwich L/Os.
Does anyone in the Milwaukee market do them? If so I'd really like to pick your brain! lol
I just want to know what the BiggerPockets community thinks about this and how they get around these obstacles because I know these techniques wouldn't be around if people weren't making money off of them. But if they do work how do they work in today's market? Let me know what you think. I can't wait to hear your responses.
Yes, people do L/O in our market, I'm honestly not sure how many of them are happening these days, but they do happen. I was just talking to another local, MKE area RE investor who was telling me about just completing what I believe was his first ever L/O, rent to own, whatever you'd like to call it rehab project and "sale" (well, L/O sale) and he thinks it looks very good from his point of view so far.
As far as what that man told you, I'm not a mortgage expert (although you could certainly find others around town for a second opinion) but from what I know, I think what he's telling you is essentially correct, as far as I know. I do know a fair amount about credit scores and theoretically, IF someone with otherwise great or good credit somehow had their financial world collapse on them and they filed for bankruptcy or were foreclosed on, I suppose that would fit your idea of someone with one big screw up on their credit that disqualifies them, at least temporarily from buying a home. I think that's an EXTREMELY unlikely situation though! Every story I've ever heard of someone being foreclosed on or filing for bankruptcy is at the end of a usually long road of credit problems. Even the story of people who get whacked with some massive and uncovered medical expense who file is usually led up to with other bad marks on their reports. Plus, as far as I know, if you are foreclosed on/file bankruptcy, assuming you get your financial house in order, you should be able to get another mortgage after a period of time. I'm not sure on the time frame, but 3 years sticks out in my mind.
The problem is what he told you though, usually people like that face continuing credit issues, unless they really turn over a new leaf and nail things down. The other concerns are also as he mentioned, getting a home mortgage depends on much more than just a great credit score, you also need good ratios on your front end (ALL housing expenses incl taxes, ins, etc) and back end ratios (ALL debt expenses, housing, credit cards, car, etc) so a good income is required, as well as a down payment of some sort (some programs go as low as 3.5%, others still want 20%) Assets can also figure in to this as well, but that's getting away from the bit I know about current lending standards and I don't want to start going off the wrong path here!
Yes, theoretically, someone well over 700 could easily not qualify if they don't have the income, assets, etc and have other debts as well.
That all having been said, I wouldn't let that at all discourage you from exploring and maybe getting into L/O investing though! I think you'd need to change those standards though, but there are people doing well in L/O, at least last time I checked!
Account Closed There is a market out there available to help people who are just barely below the score needed to get a loan. Someone just needs to spend some time to work with them. Many of there people will have a 580 score for the rest of their lives, no matter what you do to help them, but some will work to get their situation improved. The question is: do you have the time available to work with them. Cause you will have to follow up with them and stay on top of them and hand-hold them. But, it can be done.
@Robert Taylor Well that's really good to know. Could you refer me to any of them? I'd really like to see what kind of strategies and models are out there, especially in our area.
@Bryan L. Thank you for the response. I do have the time to work with them, especially because I want to monitor the situation and make sure that it's all going well. So I have no problem with that. I'll keep looking but I just hope that I'm not looking for something that's exceptionally hard to find, like a needle in a haystack.
Thank you guys so much for your response. I'll keep investigating and doing my research until I'm set up correctly. Then I'll take a chance and do it.
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