Beginners Questions On Lease Options
Ok I have been reading Conti and Finkels books on lease optioning Sub2's and such and I have a question for those of you that are experienced at doing these types of deals.
When I am looking for tenant buyers my understanding is that they would look to do a rent to own for a few reasons. One is poor credit, one is not enough down for a regular house mortgage, not showing enough income to qualify for a mortgage or a new business owner that can't show a long enough income history. Wellif I have someone who is interested in the lease option and ask them for a substantial downpayment, how many really have it? If they have bad credit wouldn't they use the cash to pay off thier debts? also if they had the cash in the first place they probably wouldn't have bad credit to begin with ( exceptions non withstanding), If they have a large enough downpayment for me then wouldn't that downpayment be large enough for the bank to give them a loan? as far as the income is concerned, do I really want to have people renting a house from me that the payment is higher than a payment that a bank wouldn't give them a loan on?
Thanks for your responses in advance
Joe
[addsig]
Joe,
As you've already pointed out, there are a number of reasons that buyers can't get financing besides just bad credit. It just happens to be the most common reason. Also, "bad credit" is a subjective term to an extent. The majority of buyers try to get a loan thru the local banker (the most restrictive lender) and don't qualify for their program, and don't they have bad credit. These same buyers, if working thru a good mortgage broker (someone you should have btw), would have little problem getting financing. Also, bad credit people want rent to owns because with 12-24 months of "on time" payments, it becomes much easier for them to get financing.
Downpayments on lease/options in real life generally fall between 1-3% of the sale price, but your market will really determine your down. At a certain down, it will be gone in a week. The higher the down, the longer you'll have a empty property.
Answers to your other questions. Bad credit doesn't always mean outstanding debt. It could also be a debt that they felt shouldn't be or an ex's debt that they refused to pay. "IF they had the cash in the first place, they wouldn't ...." This is not true. You can make bad decisions whether you've got cash or not. I just put someone in a house that makes $52K a year, yet he had bad credit. Why? Trying to "keep up with the Joneses" proved more than his income could maintain.
As far as your payment is concerned, all you want to make sure of is that your TB has enough gross income to easily make your payment every month. 25-35% of their gross monthly should be tops for your payment.
To be honest, you really shouldn't worry about this that much. People do dumb things all the time. I learned a long time ago to stop trying to figure out why they do it and to just accept that they do.
Some of my best payers have been the ones with the worst credit, while some with better credit wouldn't pay at all, so you will really never know for sure.
I always tell any potential TB that I do run a credit check but it is to determine how long the L/O will likely be for. Sometimes, we find out that they can buy the property outright if they want, and we go that way (that will make you a star in their eyes quick). Sometimes, we find that they have either never paid anybody or that they have some massive judgements on file. In these cases, we go back to the possible TB and tell them that due to past payment history, we'll need a bigger down, or that while they qualify for our L/O, they have a large debt that must be paid or they will never be able to get in the house. Some will still want in, others will walk.
Roger
Hi Roger,
Just curious when you look at the credit report do you have specific guidelines that you follow when qualifying TB? You mentioned non payment and large oputstanding liens would prompt you to require a large down payment...do you make this large enough to carry the risk that they will not pay and you will have to evict? Do you have certain formula that helps you determine the down payment? Are there any scenarios that you would not L/O based on the credit report?
Great answers! thanks, While reading the Conti/Finkel book they were asking for like $10,000 option payments. Thats what confused me. Also do you ever work into your contracts that the seller basically can't do anything to screw up thier credit so as to not sabatoge financing at the end of the lease option?
Joe
[addsig]
pushcart,
I do not have a formula for determining the downpayment other than my presentation when buyers call, which is "the purchase price is $XXXX, your monthly payment is determined by your downpayment." Often, they respond, "what's the minimum down and the monthly?" so I have an example for them, if you have $2K down, your monthly will be $XXXX per month. Less down, higher monthly, more down, less monthly.
Credit checks are more than pulling a credit report. I call past landlords and employment as well. Frequent moving in either jobs or homes require a larger down. A history of chargeoffs and non-pays require a larger down as well. NOTE, I don't turn anyone down. I simply require more $$$ if it looks really bad.
Alot of times, you just have to go with your gut feeling about people.
As stated, I don't turn anyone down (at least not yet). However, some things, like large judgements/liens against the buyer, I discuss with them at length BEFORE they l/o. I inform them that these liens will have to be paid before they can get financing, or at closing, and if not, they may be throwing their money away. Then it is up to them to decide to L/O or not.
Joe,
You can put anything in your contract that you want. If your home has a back deck, you could put in the contract that they are not allowed to go out on the deck or the contract is null and void. Then it's only a matter of convincing some idiot to sign it.
You can put that in your contract, but nobody (well nobody that I know) intentionally tries to "screw upr" their credit. Things get out of control for them and it happens. Putting that in your contract is not going to magically stop that from happening.
Had one recently where the L/O was coming due. TB went to the broker, had his credit pulled and it was 50 points WORSE than before. Oh no, what to do??? Well, if they've been a pain, now is the easiest time to be rid of them. Sorry it didn't work out, let me know when you get that credit fixed a bit. I'll get you a great reference for your next landlord. However, if they've been a good tenant, simply make a new contract. Restructure the purchase price, monthly and maybe collect a little more down.
In my case, because they have paid well, I simply gave them a new contract with a new purchase price and $20 per month increase in payment.
Roger