Lease Option Not A Good Idea According To My Lawyer...Why Not?
We own a home that we rehabed. It is mortgage free. We want to sell and move to Florida. We have a very interested buyer, but due to bruised credit isn't qualifying for a mortgage. They have 4-5K they would put down on the house with a L/O and need 2-3 yrs to clean up their credit.
Our lawyer doesn't like this idea - says there are too many pitfalls. It took 4 months to find this interested buyer and we need to get to Florida. Are WE crazy to think this is a good idea?
Input appreciated...One more thing: Would you advise that we take a not too large home equity loan to help us with our move?
Thanks!
Wendy
I suggest you keep looking for another buyer with more money to put for a down payment. Then sell the property on a owner financing and have your attorney draw the contract. Don't take less than 10% down if selling as owner financing.
thanks for responding. but then wouldn't we have to foreclose if they didn't pay? and on the l/o my understanding is that we could evict, keep the non refundable deposit and start over. we would also cash out after the 2-3 year time frame given to clean up credit and get financing. i'm kind of new to this but that is my understanding. any help is appreciated!
Please help! any input is better than none. We need to decide soon or put it back on the market. must get to florida.
thanks
wendy
Most attornies are conservative in nature when advising their client, especially if they are not versed in what they dispense advise about, and also if they believe you are not versed as well. What are the pitfalls? 1st, are you prepared to be a long distance landlord? Can you afford it if they do not pay, or damage the residence? Are you able to re rent the place if they move or you have to evict? Do you have the resources to repair things until you are cashed out? Personally I would find another attorney. Do you have enough knowledge to know that what you are talking about are 2 different transactions, those being a lease, and an option to purchase? 4-5k down and an opportunity to structure a deal where they can refi in 2-3 years, coupled with the fact that you are motivated? I'd be doing the deal... but it is known that high have a pretty high threshold in the risk/reward arena.
Good Luck,
Shawn(OH)
First let me agree with Shawn from Coshocton, Ohio . He gave you a lot of excellent info./Questions **YOU do not need an attorney to do any of your Lease/Option. **This is the business that I am in. In fact my target audience is POOR CREDIT People.
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[ Edited by rajwarrior on Date 03/18/2004 ]
I would take as much equity (HELOC)as I could and move to Fla. The only problem is the tenant. If he doesnt get a mortgage then you have to evict. I also have several L/O's. and have kept several 'non-refundable option considerations' from tenants that have left. Some leave easy and some, not so easy. You have to be able to handle the eviction from a distance. If you have the LOC it may afford you the $ necessary to commute from Fla to NY, if you have to be here to get them out. Perhaps you can find a junior partner who is in your area and, for a piece of the action, will manage the property for you. If you were closer I would do it. Check the papers and see if there is an investor, local, that is willing.
Just a thot
Joe
Thanks for the replys. Yes i'm willing to be a long distance landlord, and i have local people that would help and if i had to make a trip to take care of property related isues i could write it off...right???
so if we agree that i should do it, to what extent do i leverage it???
thanks
toes
If it took 4 months to find this buyer then it shounds hard to find another. Just do the deal and hire a property manager.
Will cost you about 10% of monthly rent. If you are long distance dont do it yourself. This is no different than renting a property except you have the extra 4 to 5K.
Let the proerty manager/realtor keep a eye on the place and go thru the eviction process if needed, and deal with repairs.
Dont try to do this long distance. If you can try to increase rent to help cover extra 10%. If not still worth it. If evict you will already have a relationship with manager and should not charge you any more to find a new L/O tenant with another 4 to 5K
You should definitely raise the rents to pay for your commuting cost. After all, you are selling the american dream. Ask for an extra $100 or $200 per month and put it towards the purchase price when they exercise the option. Just a way to squeeze a little more cash out of the deal.
thanks again for the helpful suggestions
toes
You could leverage it to the extent that there is cash flow and that the price of the house doesn't exceed the price you set for the LO.
Make sure that you set the LO price for what the house will cost in 2 years LEAVING A LITTLE ON THE TABLE FOR THE TENANT BUYER. i.e. if the house is 100K this year and houses in your area are going up 5% a yearthen in two years it will be worth $111,025 so sell it to them for 106-107K.
thanks. good advice!
toes
What issues do they have with their credit that will take over 2 years to recover? Do you have a mid-score on their credit or have any scores for them? Have you seen their credit report? I've had hightech friends that had great credit, got caught in the dot-com bust, BK'd, and started reestablishing credit. I'd L/O to them in a second. Besides the good advice of L/O with an option fee you might also consider the combination of HELOC, an option fee, and charging a higher rent with a portion of that credited to the future purchase. If they don't buy, you keep the option and the credit. I would strongly advise previous landlord references to see how they treated the property. Credit issues can happen and that's an indicator of how they manage their life, but references are also important. Evicting isn't always simple, but it's easier than foreclosing.
Best of luck,
Gary :-D
What issues do they have with their credit that will take over 2 years to recover? Do you have a mid-score on their credit or have any scores for them? Have you seen their credit report? I've had hightech friends that had great credit, got caught in the dot-com bust, BK'd, and started reestablishing credit. I'd L/O to them in a second. Besides the good advice of L/O with an option fee you might also consider the combination of HELOC, an option fee, and charging a higher rent with a portion of that credited to the future purchase. If they don't buy, you keep the option and the credit. I would strongly advise previous landlord references to see how they treated the property. Credit issues can happen and that's an indicator of how they manage their life, but references are also important. Evicting isn't always simple, but it's easier than foreclosing.
Best of luck,
Gary :-D