Do Not Credit Rent To Down Payment Question
I have never done a lease option and am a total newbie. Please forgive me if this is a stupid comment/question.
I read somewhere that any credit given on the rent should NOT be credited to the down payment as this amount will need to be brought at closing. It was recommended the credit be put towards the purchase price instead.
Any comments on this as it seems most people here are advising to credit the down payment.
Sidwyn
I just finished listening to Vena Jones-Cox course on lease options. She says that obviously it is better for the the tenant/buyers to credit the down because they then need to come to the closing with less cash. Less cash means more chance that they will close. She also said that Fannie Mae guidelines (believe it was Fannie Mae) said that only above market rent could be considered rent credit that could go towards the down payment. So if market rent is $600 and your rent is $625 then only $25 could be considered a rent credit that could be applyed towards the down.
Brenda
We apply it to the down, but it depends on the deal, purchaser, and most importantly their lender.
Hi, Sidwyn
Keep in mind that a lease/option is really two contracts-- a lease and an option to purchase. The folks that taught me strongly recommended that the two be kept separate (separate documents) so that one could be sold while keeping the other.
You should specify what the lease payments are just as you would any other lease. The part where you may want to be creative is in how the option consideration is structured. The option consideration can be one lump sum or payments every month or any other arrangement that allows you to receive consideration for granting the right to purchase at a future time. You can credit all or part of the option consideration to down payment or price reduction, or not at all.
You want to keep the option consideration specified separately from lease payments in your agreement since option consideration is not taxable to you until the option to purchase is exercised or the option is abandoned or expires (unless there has been a change in tax law).
I hope this is of some help.
Regards,
Ed
You should have the rent credit meantioned in the option contract, but not in the lease. If you are collecting $900 and want $50 of that to be a rent credit the lease would say that $900 is due each month and the option contract would say that $50 of the rent would be applied towards a rent credit, when the rent is paid on time and in full. This way the tenant/buyer can not say one month that he does not want to pay the extra $50 for the rent credit and only gives you $850.
Brenda
I just started (slow learner) giving an augmentation in the option consideration (think rent credit) on a periodic basis.
Two points: 1.The option consideration is not refundable. 2.The option consideration is not taxable until the option expires or is exercised.
In the $900/mo example above, $850/mo would be taxable as rent and the $50/mo option consideration non taxable until the triggering event.
Thanks for the feedback guys