Leased House Decreases In Value
Say you lease option for a the appraised value plus 5% for each of two years. At the end of the lease they option out and find out with an appraisal that the house is worth 10k less than what the option was. Will banks still loan for the option amount. Does this ever happen? Thank you.
corey
You might want to check on another appraiser, or was that one with a reputable bank?
It was just a hypothetical question. I'm getting ready to lease/own a property and was wondering if the house doesn't really increase in value the way we figured in our original agreement... and if there is a chance that the mortgage company or bank won't loan for the agreed amount.. Thanks..
boehnc,
"Say you lease option for a the appraised value plus 5% for each of two years."
So...you are going to do a L/O and after 2 years ...you will be paying 10% more of what the current appraisal is now...
Example...Appraisal is $100K and in 2 years you will close at $110K...
"At the end of the lease they option out and find out with an appraisal that the house is worth 10k less than what the option was. Will banks still loan for the option amount."
IMHO...I don't think so...
"Does this ever happen? Thank you."
I am sure it has happened...
HopeThisHelps...
....as always,
GoodInvesting, Rocky
In my "hypothetical scenario", I have a house I want to lease option to somebody else.
Example: House that is currently appraised at 100k. We work out the terms in such that it increases in value to 110k in two years.
My question is if the house say, remains appraised at 100k, will a bank loan sombody 110k..the terms of our agreement. Or what happens when the individual who wants to option out the deal, and finds the house hasn't increased in value, or decreased in value for some reason...
well, there are 3 options.
you can lower your asking price if you have room to do so.
the buyer can come up with 10K cash, since the bank won't loan the extra 10K.
if there's a good spread between the rent and the cost of carrying the mortgage, tell the tenant/buyer to take a hike and find someone else to lease it to.
niravmd,
I can't see TheBank coming up with a 100%LTV mortgage...even with PMI..
Don't forget, these buyers are on a L/O for some reason...money, credit or whatever!
....as always,
GoodInvesting, Rocky
To answer your question, yes you could get into trouble. The banks won't lend 100% LTV. Too much risk.. I've been told this many times.. You can lower the price or ask your seller to extend the option period.
I was just worried because I am thinking about L/O a new house and didn't know how the unestablished neighborhood would act (increase/decrease in value). I guess the key would be to get as much option money as possible so they wouldn't have to finance as much ?? Anybody have any tips on L/O new houses? I already have 10% equity.
The lender will traditionally lend on a refi a percentage of the appraised value. If the buyer wants to pay the extra money, it would have to come out of their pocket. The danger is in the court system. A lot of judges might be led to believe that the big bad investor took advantage of poor uneducated Mr Smith. and force you to give back their option deposit and all their payments for being such a dastardly person. Don't laugh, remember the person who won the suit against McDonalds because they got burned with coffee?
[addsig]
I am in mortgage business, so I know how the lenders work. They will only lend your buyer based on the appraisal value or purchase value, whichever is lower. Good thing about lease to purchase transaction is that the lender will treat it as almost as refinancing transaction. As long as there is enough equity and/or rent credit, your buyer will not need to bring any money to close the loan. (LTV will be determined by your buyer's credit, of course) In normal purchase transaction, the buyer must pay closing costs (net of seller credit, if any) and down payment out of pocket. Most people who enter into lease to purchase transaction have some money, employement, and/or credit problems. I think that the seller should charge a couple of hundred dollars higher than the fair market value of the rent for the property in the area, so the seller can give the buyer rent credit every month. The accumulated rent credit can be used as down paymnet or closing cost, when the buyer actually buy the property. This might offset the difference between purhcase price and appraisal value. If some reason, the buyer did not buy the property, he or she will lose the rent credit and any other money paid to the buyer. hope this helps.
This happened to me in the early 90s when the Real Estate market crashed in California.
I had many L/O properties and told the owners that if the price of the house went down, I would adjust the sales price to the appraised price.
Of course, you have to make sure there is enough equity in the property in case this happens, so you don't lose money.
Luckily, I bought the properties in the mid-80s and ended up at least even on those deals.
Hope This Helps!
Mrs. Meltzer
An Option is the Right to buy in the Future at a price negotiated today. If the ppty goes down in value, the Optionee would not want to exercise his option to buy at the previously agreed upon price. He would want to negotiate a new lower price.
pmatheson1,
"If the ppty goes down in value, the Optionee would not want to exercise his option to buy at the previously agreed upon price."
and, may I add....They WILL LOSE their OptionMoney!
"He would want to negotiate a new lower price."
Only if the OWNER is open to RE-negotiate.
NotMe!!!!
I only do L/O...and treat the Lessee as if they had a 30yr amort. loan...
TheyBoughtIt/TheyLiveWithIt
The same thing EVERY...BuyerOwner lives with!
....as always,
GoodInvesting, Rocky
Thanks for all the responses. I was thinking about doing a lease option with two houses that I have, both new construction, of which I didn't have to buy with anything down or closing costs with 10% equity...straight from a builder. One I bought last year. The other is being built right now. Any concerns anybody might have out there? My question was just a concern I had if the houses didn't increase in value being in new developments and all. Anybody have experience in l/o with new construction? Thanks!
If they are new construction, there is a chance that the value will not go up, if the builder is still building in the subdivision or nearby. It happened to somebody I know. He bought a new townhome for 136K, and is trying to sell it for 129K a year and half later, but can't sell it. He probably has to reduce it to 119K. A huge loss!! The biggest problem is that there are still brand new houses listed as builder's close out sale in the same subdivision and there are too many houses just like him outside of the subdivision, but cheaper.