I Was Thinking...maybe I Didn't Do It Right
Okay, so here we go. I've got four houses that I've lease optioned so far, right. Now, I was sittin' around tonight looking over my files and started to run the numbers on the houses. Most of them had no equity in the house when I LO them. Now, my question is this.
Most of the houses are on a one year lease, and most of the TB have expressed interest in purchasing the houses before their lease expires. Now, I did a quick check at the numbers and with rent credits and the option deposit none of the houses will have 10% paid in, which is suppose to act like a down payment when they go to cash me out. Is this going to be a problem to get them financed? I'd like to get rid of them at the end of there leases. Now, the only reason I'm asking is because I heard you need at least 10% to get a convential mortgage and they prefer 20%. So, since at the most they will have 6-8% when we go to the bank, am I going to have a problem getting them financed or should a good mortgage broker be able to find the money?
Thanks,
Mitchell
Find a good mortgage broker who is willing to work hard getting your l/o clients loans. With all of the programs out there it should not be hard to find one.
Kingmonkey,
Just a thought - You might try extending your term for 2-3 years instead of just 1 yr. That way it gives your t/b some time to build up a bigger down payment and clear up any credit problems. Also, that amount of time will give you more equity in the property thereby increasing your backend profit. Just my 2 cents.
Robert
With good credit, low DTI, and compensating factors 95% LTV is the max for conventional financing. 20% down is wise because at that LTV PMI will not be applied. Obviously, lenders like for borrowers to have a personal investment in the property. Notwithstanding, competition is strong and lenders are looking at loan quantity as much as quality. If the lessees choose a portfolio lender, their likelihood of an approval increases. Most first time homebuyers put down anywhere from 3%-10%.
The lessees have hundreds of options on financing.
80/20 1st and 2nd
100% LTV
107%LTV
95% LTV conventional
3% down FHA/VA
Just to name a few.
Here's another creative idea...
You can talk to the TB about the issue and work out a payment plan (by highering the monthly payment and start giving credit to their downpmt) to get the $10k for them by the time they want to purchase the property.
Yep, Mitchell, you did it wrong (but don't worry about it, there are a dozen ways out from here)
What you should have done was sell on land contract/purchase agreement. In this way your buyers would qualify as refinancers which means that after a year the only issues would be their credit and the market value of the houses, the initial purchase price and the downpayment would not be considered by most lenders. On the other hand had they defaulted you would have had a more difficult time getting them out of the house, so maybe you didn't do it wrong after all.
Assuming you didn't record the lease/options you could go back and re-write the deal as land contracts with the same price and payments and back out the other terms from there, back date the paperwork and you are good to go.
What has happened to prices in the meantime? Granted that there was no equity in the houses when they entered into the L/O have prices increased enough to get you out of the mess (i.e. at least a 10% increase in value) . If prices have gone up you could void the old L/O agreements, and write new ones (or land contracts or purchase contracts) at the higher price giving the difference in price to the tenants as an option payment/downstroke.
What price range are the units in. If the price and the tenants qualify you could do FHA loans at 5% down.
There are other options, you just have to plug in those creative investor gray cells.
You can refi on a L/O.
Brenda
I can't sell on a land contract if I don't own it can I? Don't I first have to have the deed? I'm pretty sure selling something you don't own is illegal. Anyway, that's not the point.
I don't like Sub2 (not that it's not a great method mind you) because 1) I don't like the idea of sellers having a share in the equity (I got screwed on that my second deal--judge said I had to foreclose), 2) I can give a LO house back to the owners if I don't want it anymore. They just keep all of my earnest money as liquidated damages, says so in my rental agreement with them. 3) I just think it is easier and a much smoother transaction then sub2 (athough I'll do one every once in a while).
Anyway, thanks for the comments guys. I figured if worse comes to worse I can hold the houses a few more years. Hell, my lease with the sellers is for 6 years each, I'm not even done with year 1 on most of them.
Thanks again,
Mitchell
2) I can give a LO house back to the owners if I don't want it anymore. They just keep all of my earnest money as liquidated damages, says so in my rental agreement with them.
Mitchell,
With a town the size of Granbury, aren't you concerned with your reputation being tarnished by non compliance??? Just a thought neighbor...........
Quote:Now, I did a quick check at the numbers and with rent credits and the option deposit none of the houses will have 10% paid in, which is suppose to act like a down payment when they go to cash me out. Is this going to be a problem to get them financed? Mitchell,
I would never write a lease option agreement that applies option consideration and rent credits to the buyer's downpayment. You may need to get a legal opinion on this point, but I maintain that doing so creates an equitable interest in the property. If the tenant buyer can not get financed, then a court may rule that the buyer is entitled to a complete refund of his downpayment (which you call "non-refundable" option consideration and rent credits).
Instead, the option agreement should apply option consideration and earned rent credits to a reduction in the purchase price. Nothing is applied to the downpayment. If the buyer wants an 80% LTV loan program, then the buyer will still have to come up with 20% of his purchase price out of pocket. All I have done is reduce the purchase.
Mitchell,
Maybe I didn't understand your ownership here. Granted that you've lease/optioned the houses to your tenant/buyer how do you hold title now? Are you a lease/option purchaser as well?
Brenda,
Yes there are some lenders who will consider the exercise of the option to be a refinance but by far the majority will consider this a purchase and require conventional downpayments.
Mark
When someone lives in a property for a year, pays by check or money order the amount due to the seller, they are able to refinance the property regardless of the situation.
Here is the catch!!!!!!! They must be able to qualify for the loan. They will be able to go off of the appraised value. But if they don't qualify for the LTV needed to make the deal work, it is a waste of time.
If they didn't qualify for a loan last year, have they done or are they doing what is needed to be able to obtain 100% financing. That is the main question.
When you put someone into these contracts did you sit down and explain what their goals should be? I know some of you are may think this is not your job. But I have always felt better with everyone having a clear understanding of what the final outcome should be.
I treat my tenants like my children, I have found that people with bad credit won't take charge unless you give them a plan to follow. I have gotten several peolple eligible for 100% financing by doing this. This will eliminate having to extend the contract.
If you are not able to decide what needs to be done, find someone that does in your area.
Good luck
Lori
[addsig]
DaveT: That's how I have it set up. There isn't any "this will apply to your downpayment" mentioned in option agreement. It states that any the non-refundable option consideration will applied to the purchase price of the house. ("Optionee has paid the sum of $__________________ as non-refundable option consideration which will be applied toward the purchase price of the property if, and only if, Optionee exercises this OPTION to purchase."
.
Commercialking: I am a tenant/buyer with right to sublease. I don't like to own things.
tinman1755: When I put these people into the homes they had ok credit but for some reason they couldn't get financed. Mostly because of debt-to-income. I put them all in credit counseling and then we sat down and figured out how much more they could pay on top of what CCCS told them. Most of them have been able to reduce their debt load by 20%, which is damn good if you ask me. I'm real proud of these guys because they take home ownership very seriously.
I've told them the situation and they are fine with just continuting to lease as long as the price of the house keeps coming down.
Thanks guys!