Boynton townhouse - lease $2,050 or market $2,300?

Question

Hey all, I need a second set of eyes on this one because I keep going back and forth.

Looking at a townhouse in Boynton Beach for a buy-and-hold. Seller is telling me rent is $2,300. I asked for the lease, the actual lease says $2,050 and it renews in 4 months.

Purchase is around $285k, HOA is $310 a month, taxes right now are low because the seller has homestead, but we know that will change after sale.

If I run it at $2,300 rent, DSCR looks fine, around 1.15 or so. If I run it at $2,050 and use reassessed taxes, it drops under 1.0 and the deal does not work for DSCR.

My gut says use the lease number and the new taxes, even if it kills the deal. But the seller and the agent keep saying "market rent is $2,300, just use that, the lender will use market rent."

For those of you who have actually closed a DSCR loan in Palm Beach County, what did your lender use? Lease or market? And did they use current taxes or reassessed?

I don't want to tell my borrower this is a good deal if the lender is going to underwrite it at $2,050.

Appreciate any real experience here, not just theory.

Muyees Ayilara · Answer

Chris, that's a good point. Get it in writing before I tell the borrower it works. I learned that one the hard way. Verbal "yeah it should work" means nothing if underwriting uses a different rent or tax number. Are you running into the same lease vs market issue on your deal in San Antonio too?

Chris Colton · Answer

Your gut is right, and you already have the answer in your own post. The lease says $2,050. That is the number I would plan on until someone shows you different in writing.

The part I keep learning is to get the lender's answer in writing before I tell anyone the deal works. A short email that says, here is the lease, here is the purchase price, what rent and what taxes will you underwrite to, saves a hard talk later.

I am still a student on DSCR, and I have not closed one in Palm Beach County. But I would not tell a borrower this one works until the lender answers that email with the lease number and the new taxes.

Devin Peterson · Answer

Your gut is right. On a purchase with a lease in place, a lot of DSCR lenders will use the lower of the actual lease or the appraiser's market rent (the 1007 rent schedule). With a signed lease at $2,050, I'd plan on $2,050 even if the 1007 comes back at $2,300. Some lenders will go off market rent when the lease is below market, but usually with conditions or a pricing/LTV hit, so I wouldn't build the analysis around it.

On taxes, underwriting generally won't use the seller's homestead bill. Expect them to estimate it off the purchase price and the current millage. In Florida the homestead exemption and the Save Our Homes cap go away after the sale, so the new bill can be a lot higher. Also make sure the $310 HOA and a real insurance quote (a big one in South Florida) are in the PITIA.

If it comes in under 1.0 at $2,050, a few things to look at: some DSCR programs allow under 1.0 or even no-ratio at a lower LTV and a higher rate, a bigger down payment to bring the payment down, or using the actual lease to renegotiate the price. The lease renews in 4 months, but a higher renewal doesn't count until it's signed.

Running it at the real lease and reassessed taxes is the right call for your borrower.

Muyees Ayilara · Answer

Devin, appreciate this. Confirms what I was worried about. Lower of lease vs 1007 makes sense - I don't want to send my borrower in at 1.15 and have it come back under 1.0. And taxes - that homestead coming off after sale is what kills a lot of these Boynton deals.

Quick follow-up - on those under 1.0 programs, are lenders mostly doing lower LTV with higher rate, or bigger down payment to bring the payment down?

Thanks again.

Boynton townhouse - lease $2,050 or market $2,300?

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