Creative Financing For Lease Purchase Tenants

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lease purchase tenant financingWhether or not you actively work with lease purchasers, there will probably come a point in your investing career when one of your tenants will want to buy your property from you. As far as I’m concerned, every investment property that I own is for sale.  If the price is right I will always entertain the prospect of selling a property. This can be especially lucrative when selling to a tenant because typically you can sell for top dollar and avoid paying real estate commissions.

For the most part, the tenant pool is comprised of individuals who are renting because they don’t meet acceptable  lender guidelines to be approved for a home loan. Occasionally, however, I’ll encounter a tenant who has only one or two small obstacles (typically credit) keeping him or her from being financeable and they simply don’t have the guidance or know-how to overcome these issues.  In this situation, you as the landlord can provide some valuable direction.

One of the first things I do when screening a new tenant is to check his credit to see if there is potential for the tenant to purchase in the near future. If the credit score is in the neighborhood of 620, I’ll usually broach the subject of renting with the option to buy.  When I identify a tenant who is a good prospect to buy, I’ll try to connect the person with a reliable loan officer specializing in FHA loans so the potential buyer can be coached through any issues holding him back from a loan approval (for example: increasing credit score, adding trade lines, paying down debt, etc.)

While there is no one-size-fits-all approach to this scenario, I always encourage investors to think outside the box as it relates to helping a tenant obtain financing.  As an example, I had a tenant a few years back who had a good credit score, but she lacked the money to pay for both the 3.5% down payment required by FHA and a collection for $4,000 (on her credit report from a loan that she had co-signed). I had enough margin in the deal that I was willing to help her pay off the collection so that she could buy the house from me. While I knew there was an element of risk, I had a great rapport with the tenant, a promissory note in place and confirmation from the lender that once the $4,000 collection was paid, she would be approved for the loan.  In the end, I was able to sell the home for full retail value with no real estate commissions. In addition, over the past two years I’ve received monthly payments from this tenant toward the $4,000 I loaned her to pay off the previous collection.

There are many ways to help a tenant get past the barriers preventing him or her from buying your property.  While your tenant may resolve issues on his own,  as an investor you should still arm yourself with as many tools and as much knowledge as possible to help facilitate the purchase.  This may include getting to know FHA lenders in your area, becoming acquainted with credit counselors, boning up on down payment assistance programs, and other connections to help get tenants approved and on track to purchase your house.  Having the skills and ability to sell your rental properties for an excellent price with a minimum of time expended is a great way to grow your business and your wealth!

About Author

Ken Corsini

Ken Corsini G+ is the host of the Deal Farm Podcast (on iTunes) and has 10 years of full-time real estate investing experience. His company, Georgia Residential Partners buys and sells an average of 100 deals per year and has helped hundreds of investors around the country make great investments in the Atlanta market. Ken has a business degree from the University of Georgia and a Master Degree in Building Construction from Georgia Tech. He currently resides in Woodstock, Georgia with his wife and 3 children.

6 Comments

  1. Great post. There is nothing that you can’t do if you look at the big picture and are willing to communicate. You never know the answer someone will give you until you ask and if you can find a scenario that works for all invovled they you are money. Keep up the good work, thanks for the encouragement.

  2. If you feel that the potential buyer has fair credit and you are considering doing a lease option why not sell to them using a subject to mortgage or a wrap?

  3. I recently purchased real estate for the first time last year and a tenant straight away asked me about rent-to-own. I never thought about it before but after pondering a few seconds, I said “yea” and that I’d think about it.

    Superb points about the lack of commission fees but it does seem to me that you have to be fairly skilled in the real estate business and its legalese to sort through a rent-to-own process.

  4. Might I add another point which is: the tenant is MUCH more likely to look after the property having in mind that they may one day be the owner! Even if its dastardly psychological in offering, the strategy would more than likely serve to maintain the value of your assets.

  5. This is a great article with thoughtful comments.

    Tenant Buyer Marketing is a pain but can be done with websites and drip articles to get their sincerity high.

    You can visit them and give them a Tenant Buyer Consultation for a fee (teach them LO marketing and terms of a Lease Option Arrangement.
    Get disclosures/disclaimers such as
    “Consultant, is only rendering an opinion and will not be held liable for any loss the client(s) may incur resulting from this consultation on the consultation.” See a contract attorney for your consultation agreement.

    Then get the Tenant Buyer Candidate on a VIP List. Then go find them a house.

    CFO and a Lease

    When you find high income, good option money and mid FICO, you can consider a Lease and CFO, which is a Contract for Option to Purchase.

    Say the TBers have a new business, and need 2-3 years, as self employed people need better proof of borrow-ability.

    A CFO and a lease for 2 years, paid on time, then an option to purchase is implemented, but the buyers have to comply with the lease terms first.

    Option can be held in escrow, as a carrot to get the tenant to pay the lease on time.

    And this avoids equitable interest, or a disguised sale, as the tenant is working toward the option, but does not possess the option yet.

    There are great benefits to a CFO over giving an unproven tenant an option in hand.

    Brian

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