Rent Price in relation to Option Fee

27 Replies

ARV 99,990

PITI 600

We have a 3yr lease with option

Our Option is Loan Balance at time of Closing. (currently 90,500)

I have a tenant buyer who agreed to to put down 5k and rent for 900/month. We are in the process of pulling credit and background check. So, no closing yet.

The buyer asked if he put more money down could his rent go down? What correlation would you offer $30-35/m per $1000? ($1000/36months=$27.77)

In short, what discount could you give him to buy down the rent

I would like input. I don't want to tread near Dodd Frank

First we need to deteremine how have you purchased the property. Did you purchase through a conventional loan, seller financing, wrap?

Second this $900/month, were did you create that number from?

Third what is your actual purchase price vs selling price?

these are a few things that could help clarify what you are trying to accomplish here.

You could charge them the $900 per month as a standard market rental rate and simply say no. Just reassure that all rents paid during those 36 months will be credited to his account.

Or you could be charging rent based off of a mortgage rate type formula. This would help you justify the transaction as being similar to a sale.

I leased the house for 3 years with the option to buy for the loan balance at closing. The balance on the loan is $90,500. My payment is $600PITI. The $99,900 sales price is from comps in the neighborhood. The $900 rent is less than comps in the neighborhood.

I try to buy on a falling price $90,500(less principal pay down monthly) and sell on a fixed price 99,900- 5000 option fee= $94,900 balance due when he excercises his option.

Dodd-Frank pertains to owner-carry, not lease options. You used the term "down payment" which sounds like a owner-carry. With a lease-option there is a cost of the option which pays for the fact that the owner can not sell to someone else during the duration of the option and that the option holder has a locked in price no matter how much the value of the property goes up. None of the option price goes against the price of the property. The option is not equity. The option price cannot be used to lower the monthly lease price.

If the lease-option contracts don't comply with the above they could be considered as an owner carry and have to comply with Dodd-Frank.

I hope I have helped to clarify and not caused more confusion.

Bill

@Bill Jacobsen Thank you for your reply. I may have read too much information and confused the option with equity. It looks like this one might work out.

We have offered $3600 for seller concessions for closing cost. The only real hold up now is a tax refund he is using for part of the option fee. If it does not come in (the check to him by snail mail) We are trying for a 0% note against the tax refund

I'm curious why you leased and optioned the property from the seller? Why didn't you get a deed?

Originally posted by Kristine Marie Poe:
I'm curious why you leased and optioned the property from the seller? Why didn't you get a deed?

Marie, I am new and I make mistakes. This deal has some quirks. The original seller is buying a new house. He needed a signed lease to qualify for his 100% loan (so his loan officer told me) The deal does not look to have enough equity or a rental I would want to own for the long haul. This is my first investment in 15yrs. I am using this transaction to raise capital for other deals. I am in talks with other homeowners that need work done before their house is livable. They have triple the equity but need ac units and eventually a roof. They are better candidates for the Sub 2. I am green and have a lot to learn and don't have money to spare.

Originally posted by @Nettles Mason :
Originally posted by @K. Marie Poe:
I'm curious why you leased and optioned the property from the seller? Why didn't you get a deed?

Marie, I am new and I make mistakes. This deal has some quirks. The original seller is buying a new house. He needed a signed lease to qualify for his 100% loan (so his loan officer told me) The deal does not look to have enough equity or a rental I would want to own for the long haul. This is my first investment in 15yrs. I am using this transaction to raise capital for other deals. I am in talks with other homeowners that need work done before their house is livable. They have triple the equity but need ac units and eventually a roof. They are better candidates for the Sub 2. I am green and have a lot to learn and don't have money to spare.

If a signed lease was the only way to get the deal done because the borrower was buying a new house, then that makes sense to do that. I'd have negotiated a separate agreement with option in order to get the deed soon after the borrower's new purchase and loan went through. But that's me. I'm not sandwiching myself (is sandwiching a verb?) between a seller and a buyer without a deed for the long haul. Too much dependence on stars aligning with that many players and no control over the deed. Just one investor's opinion.

Originally posted by Kristine Marie Poe:
Originally posted by @Nettles Mason:
Originally posted by Kristine Marie Poe:
I'm curious why you leased and optioned the property from the seller? Why didn't you get a deed?

Marie, I am new and I make mistakes. This deal has some quirks. The original seller is buying a new house. He needed a signed lease to qualify for his 100% loan (so his loan officer told me) The deal does not look to have enough equity or a rental I would want to own for the long haul. This is my first investment in 15yrs. I am using this transaction to raise capital for other deals. I am in talks with other homeowners that need work done before their house is livable. They have triple the equity but need ac units and eventually a roof. They are better candidates for the Sub 2. I am green and have a lot to learn and don't have money to spare.

If a signed lease was the only way to get the deal done because the borrower was buying a new house, then that makes sense to do that. I'd have negotiated a separate agreement with option in order to get the deed soon after the borrower's new purchase and loan went through. But that's me. I'm not sandwiching myself (is sandwiching a verb?) between a seller and a buyer without a deed for the long haul. Too much dependence on stars aligning with that many players and no control over the deed. Just one investor's opinion.

Please explain. I try for the KISS approach. We are going to use a third party collection/payment party to collect, pay the mortgage, pay me, and keep track of it. The owner maintains house insurance, the tenant buyer gets contents insurance and I don't have to keep track of it.

Why, one investor's curiosity, would you go for the deed? What benefits and liabilities does getting the deed differ from lease with an option? For my clarity and other BP'ers

Without a deed you don't control the property or the equity. There's nothing preventing the seller/borrower from further encumbering the property or racking up liens or filing BK. IMO there's nothing simple about what you described. We all have different tolerances and goals, and in general lease/options aren't for me. Best of success with it!

Kristine Marie Poe

Your last post I totally agree with!

No real control

@Nettles Mason

You have a real mess going on!

First off, everything Bill mentioned up there is not totally correct. The application of an option price is applied in residential as the price is not discounted as it might be in commercial. What you pay for with the option price is any difference in a discounted sale price, if any, the right to purchase over a stated term and the appreciation, if any over that term. An option does not really control the property, the seller may sell the property subject to the option!

An option may not have any requirement of performance on the part of the buyer/optionee, you, and the purchase price must be stated as of the date the option is given, reducing that price with principal reductions would the require you to perform and you don't have the option to purchase at any time to obtain the price you stated, you could only buy at the end of the option or you'd be required to pay an additional amount in excess of your stated option price.

Next issue is that in your agreement, you have credits from the reduction of principal from payments, this is a financing arrangement, it's an installment sale. The owner is exempt, I'm guessing, from Dodd-Frank, you are exempt as you are not occupying the property acting in a commercial venture, but when you wrap your agreement to an owner occupant if that buyer receives the benefits of payments then you're smack dab back into Dodd-Frank!

My question is that you said you're in this for the long haul, then why are you doing a lease-option? If it's just to obtain an option price for other deals that implies to me that you really don't intend to sell.....so what do you do when the end buyer wants to exercise that option?

Next issue, you can assign your option for a fee, but you can not give a new option to buy that property because your option does not give you ownership rights to convey title, to do that you need to be in title, not just have an equitable interest under contract.

So, you need title! Buy it subject-to, as K. Marie suggested, the seller may not have the mortgage counted against them at all if they sell, depends on that lender and that seller's qualifications, however, it may well be counted against them and the lender will use the installment sale to off set payments just as they do for the lease. (if that owner/sell has other properties leased I can see his lender going there, but if he has no leasing experience, that sounds more like a bank loan making an exception, the same exception can be done for an installment sale).

A much better thing to do is for you to buy it Sub-To, being in title you could then give an option. You can not have any financing arrangement or allow any rent credit to your owner occupant buyer without addressing Dodd-Frank issues. You can charge market rents and obtain an option price that is fully paid. Any payment of any kind that reduces a purchase price over any term is a financing arrangement.

You're in over your head here, you really need to see an attorney, seriously, trying to put a chain of options together at different prices of a purchase price must have been some guru thing, just don't do that! :)

@Bill Gulley

Thank you for your input on my train wreck of a first try. Let me start by clarifying some of my previous statements, then ask you basic questions.

1. I signed a lease with an option to buy with a seller that wanted to move, not needed to. We agreed on a sales price(payoff at time of close), term(anytime in 3yr), and bound with a check of $20. Our lease was for 3 years at $600/m due 30 days after we move a buyer into the property.

2. I found a buyer that wanted to buy. He had a bankruptcy 2009, charge offs in 2012 and a poor credit score. While marketing this house I had a retail sales price listed. After we got his credit we told him what the rent payment would be. I have not signed anything with the buyer. He sent me an email asking about a rent buy down. I started this thread to clarify what to tell him. I told him No. He said OK

3. I have sent my lawyer the contracts I have with the seller. I have nothing but talk with they t/buyer. Our plan is to correct our position with the seller before I have the buyer sign anything with our Attorney.

4. I like the idea of real estate investing. This particular house is a track house in a large development. The area has a lot of new construction and is the fastest growing part of our area. I like the area not the house.

Questions

1. How do you wholesale a house you do not own? My thoughts; you contract with the seller for an amount(an option). You sell for a higher amount(a different option?)or do you assign your option and collect the difference?

2.My intentions on DF. The buyer does not receive the principal paydown that I get. The buyer has a fixed option buy price. He has fixed lease payments until or if he buys. I may need to buy sub2 to make this happen

Bill, I read most of your post, well maybe 5,000 or so. I am not trying to do anything in the grey area. We have done background checks, megans law, income verification, debt to income (30% for lease payment). I am using a lawyer in my state. I am trying to do this as right as I can. If the buyer gets pissed in a year or three he may go get a lawyer and sue me for stuff that has no case law today. I am trying to learn what other people have done. This is an exciting new time for real estate. What did ya'll old timers do before BP?

Originally posted by @Nettles Mason :

4. I like the idea of real estate investing. This particular house is a track house in a large development. The area has a lot of new construction and is the fastest growing part of our area. I like the area not the house.

"I like the idea of real estate investing." Gotta say that made me smile. There's a scene in the movie Citizen Kane (based loosely on the life of William Randolph Hearst) where the super wealthy 20-something Kane sends his lawyers and financial advisors a telegram letting them know he's buying a newspaper. He says: "I think it would be FUN to run a newspaper".

I like the idea of real estate investing too. But I might bail on it if I didn't make any money. (Or keep it as a hobby.)

Since you've got a seller that is working with you and and you've got an interested buyer, there's still ways to do this deal so it's not so convoluted. You can go back to the seller and get a deed subject to the existing financing. You were planning on buying it for loan balance in 3 years anyway. Buy it for the loan balance now. Give the seller whatever cash he needs (if any) to sign a deed. Then rent to your interested buyer with a lease. And create a separate option to buy with an option deposit. They must be separate agreements. You must be the landlord and act as such when you are collecting rents. Tenants with options don't pay taxes or make repairs or insure the property. Additionally I'd stay away from rent credits or anything that connects the option to buy with the lease agreement. Charge reasonable rent based on income and credit history. Let the buyer decide how much option money makes sense. Remember he loses the option money if he doesn't refinance or sell.

The other alternative would be to sell to your buyer (not rent, not option) on a wrap using an all inclusive deed of trust. There's too many variables there to explain here, including Dodd Frank/Safe Act considerations. And your buyer's trashed credit and lack of steady housing payment history is not someone I'd want I'd want to lend to. Let him pay his rent on time a few years, build his credit and figure out how to refi so he can exercise his option.

Originally posted by @Nettles Mason :
@Bill Gulley

2. I found a buyer that wanted to buy. He had a bankruptcy 2009, charge offs in 2012 and a poor credit score. While marketing this house I had a retail sales price listed. After we got his credit we told him what the rent payment would be. I have not signed anything with the buyer. He sent me an email asking about a rent buy down. I started this thread to clarify what to tell him. I told him No. He said OK

3. I have sent my lawyer the contracts I have with the seller. I have nothing but talk with they t/buyer. Our plan is to correct our position with the seller before I have the buyer sign anything with our Attorney.

4. I like the idea of real estate investing. This particular house is a track house in a large development. The area has a lot of new construction and is the fastest growing part of our area. I like the area not the house.

Questions

1. How do you wholesale a house you do not own? My thoughts; you contract with the seller for an amount(an option). You sell for a higher amount(a different option?)or do you assign your option and collect the difference?

2.My intentions on DF. The buyer does not receive the principal paydown that I get. The buyer has a fixed option buy price. He has fixed lease payments until or if he buys. I may need to buy sub2 to make this happen

..... am using a lawyer in my state. I am trying to do this as right as I can. If the buyer gets pissed in a year or three he may go get a lawyer and sue me for stuff that has no case law today. I am trying to learn what other people have done. This is an exciting new time for real estate. What did ya'll old timers do before BP?

Starting at the bottom and working up, you can't do what the old timers did, things change. You also need to be careful taking ideas of what others might do as they may not be correct and what someone does in NY may not fly in TX or OH.

Your #2 when financing is actually paid by a third party in an installment or purchase contract to a second party and the second party in turn pays a mortgage owing by the first party and the third party receives a purchase benefit, that is "conduit financing" it is a pass-through arrangement. You also can not assign an installment obligation to a third party it's a bilateral contract between the first and second party. There are unilateral contracts that can be made in connection with bilateral, RE is not a good example but that gets off track on your train wreck (LOL).

#1, you don't sell the property when wholesaling you sell your contract giving another, the assignee, the right to buy under that contract for a fee.

There was a suggestion to set a purchase price lower, your option price needs to cover that spread to a lower strike price as your buyer has the right to purchase the next month or at anytime over the term of an option. In some states, they allow a delayed sale, not all, and a delayed sale agreement is not an option.

If your buyer's credit is bad, but it's affordable, and sounds like he has the chance to clean up his act in 3 more years getting past charge offs (see the status of those with a mortgage originator to ensure they will drop off in 3 years).

Actually, there are other ways to do this. Put the property in an LLC having the parties transfer interests over a schedule ultimately to a buy out by your buyer, the owner is working with you so that's an option, but, it is complicated in setting up, easy for some of us, not for everyone, I'd do it.

Buy it sub-2 and do your option.

You could also do your option and have a sandwich lease (yuk) and your buyer could do a purchase contract to purchase your option at a later date, say a year off at a lower price determined from the pay off amount. This is a contract to buy the option, not to buy the property!

I can think of some other schemes that wouldn't get you fined or have you end up in jail, but really, the sub-2 and option is probably the cleanest for you, first timer and with you using an attorney, cheaper to have them prepare the deal.

If you have read 5,000 of my posts then you're a good guy, trying to do what is right, it's just so easy to get into contracts that end up with a predatory flavor, even if unintentional, look at contracts like a math equation, both sides should be equal, or close to it.

You buyer just needs to pay rents, rent covers the mortgage on your sub-2, no issues. Your buyer pays an option fee, done! To keep the end buyer from trying to call your deal a disguised sale, keep his option fee below 10% like 8%. His purchase price can be higher than the mortgage pay off at any time over the option term, at settlement you'd net the difference as a settlement fee on your sub-2, but that needs to be in the settlement costs disclosed at the time you make your option.

Again, get with your attorney and let us know what the attorney decides to do. :)

I keep getting pop up messages about some error that BP is running a long script, so I'm out of here... Good luck

@Bill Gulley

Met with the lawyer. He laughed at what I proposing. Said my idea was creative but I could not make a new option on a property I didn't own. The sub2 came up as the best idea.

I think I will redo my option to a fixed dollar amount $90,000 and assign that to the buyer for $5000. I will loose the $10,000 potential on the sale because I didn't understand the rules before I started. I will keep the $300/m spread from sandwich lease. If the buyer defaults on the lease I will pursue a sub2 purchase. I don't want to mess up sellers closing on his new house by changing this deal.

My lawyer said he will call tomorrow after he digest the various suggestions and will give me his direction. The above is what I think he will say to do.

I like to make people laugh. I think this learning process can be rewarding. I don't want to be scared into not doing anything. So, I am doing.


Originally posted by Kristine Marie Poe:
Originally posted by @Nettles Mason :
Originally posted by Kristine Marie Poe:
I'm curious why you leased and optioned the property from the seller? Why didn't you get a deed?

Marie, I am new and I make mistakes. This deal has some quirks. The original seller is buying a new house. He needed a signed lease to qualify for his 100% loan (so his loan officer told me) The deal does not look to have enough equity or a rental I would want to own for the long haul. This is my first investment in 15yrs. I am using this transaction to raise capital for other deals. I am in talks with other homeowners that need work done before their house is livable. They have triple the equity but need ac units and eventually a roof. They are better candidates for the Sub 2. I am green and have a lot to learn and don't have money to spare.

If a signed lease was the only way to get the deal done because the borrower was buying a new house, then that makes sense to do that. I'd have negotiated a separate agreement with option in order to get the deed soon after the borrower's new purchase and loan went through. But that's me. I'm not sandwiching myself (is sandwiching a verb?) between a seller and a buyer without a deed for the long haul. Too much dependence on stars aligning with that many players and no control over the deed. Just one investor's opinion.

Best post about avoiding headaches with a Sandwich Lease Option, get the deed now or soon, but get the deed.

I am just thinking of how to do this

My seller is going to closing on his new house early May. Can I lease the property to my t/buyer on May 1 month to month and sell him the new option I create after I get the deed in 2 months?(the one 1 he thinks he is buying and has agreed to already)

I don't want to t/buyer to move in and pass on the option. Can the lawyer collect installments on an option?

Originally posted by @Bill Gulley :

your buyer could do a purchase contract to purchase your option at a later date, say a year off at a lower price determined from the pay off amount. This is a contract to buy the option, not to buy the property!

I am trying to do this. It sounds bad but.... I want to sell a purchase contract for the option at a later date. I don't want the t/buyer moving in for a year with no skin in the game. It sounds weird. Why can't you collect installments on a contract to buy the option. That is not financing the property.

I don't trust people that wear bow ties

Get a deed from the seller and take over payments. Then enter a rental agreement with your tenant AND an option to buy agreement for a $5K or $10K option fee. That's plenty of skin in the game. You get the option fee upfront. And you're collecting rent. What's the problem?

Originally posted by Kristine Marie Poe:
Get a deed from the seller and take over payments. Then enter a rental agreement with your tenant AND an option to buy agreement for a $5K or $10K option fee. That's plenty of skin in the game. You get the option fee upfront. And you're collecting rent. What's the problem?

My lawyer thinks sub2 will sink the sellers May closing. Is this normal for someone getting another loan to sell sub2 prior to the new house closing? He is seeking a 100% VA. The mortgage originator understands the lease we provided to cover the house payments and to my last phone call to the originator everything was ok. I don't want to rock the boat on his new house by trying to get the deed.

I have an option to buy the house but I want to sell it for a higher price. The buyer and seller are ready for closing. The buyer only has $6500 for the Option fee, first months lease pmt and atty fees . He can't come up with another $5000 in the next 10 days.

I feel I have a chicken or egg problem. I have a better understanding on how to structure the next deal and am just brainstorming how to put this deal together the way the pro's(you and others that have contributed on BP) are suggesting.

Wow. I thought we went over all of this already. Leave the current lease in place so your seller can close on his new purchase and loan on May 1. Go back and negotiate to buy the property sub2 the existing loan. You already have an option to buy for loan balance anyway, right? So exercise your option. Give the seller a consideration amount to get the deed and cancel the lease agreement. Then sell or rent or option or whatever. As long as you make the payments and the lender doesn't call the loan due, you have the deed so you do what you want with the property, including offering an option to an interested buyer.


Make the option fee $5K and let the buyer use the rest of his funds for 1st months rent and security deposit.

Originally posted by Kristine Marie Poe:
Wow. I thought we went over all of this already. Leave the current lease in place so your seller can close on his new purchase and loan on May 1. Go back and negotiate to buy the property sub2 the existing loan. You already have an option to buy for loan balance anyway, right? So exercise your option. Give the seller a consideration amount to get the deed and cancel the lease agreement. Then sell or rent or option or whatever. As long as you make the payments and the lender doesn't call the loan due, you have the deed so you do what you want with the property, including offering an option to an interested buyer.


Thank you for helping me with this process. The timing is what is crossing up everything. The t/buyer and seller want to close May 1. The seller doesn't close until the end of May or later based on closings. I can't create an option until I get a deed. I can't get the deed until after the seller closes on his new house. I was asking Bill Gulley how to delay the sale of the option until after I got the deed and without letting the t buyer move in without a deposit or option fee or DF problems

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