Newbie Needs Help On L/O For Own Property
I currently have a home I purchased about 6 months. It was initially purchased with the idea that it was going to be my primary residence. This never panned out and so I was considering renting the property out. That was until I came this amazing site and did 2-3 hours of research per night on L/Os
I am still a little nervous about the whole thing because of what I have read in some postings concerning a tenants earned interest in the property when rental credit is offered.
My questions are:
1. Should I offer a monthly rental credit? Is it worth the legal complications I could face down the road?
2.Is an L/O a good option here based on the numbers below:
Purchase Price: $252k
Purchase date: About 6 months ago
Currrent Value based on destop appraisal:$285k
Current Mortgage is $1300 on the 1st loan and $500 on the second. (I have a prepayment penalty on the 1st loan that's equivalent to $8k. The penalty would expire in 18 months)
Here is the problem:
Rents in the area go for $1400 so I would be negative cash flow; however, it beats the $1800 I am paying right now for a home I dont live in.
Should I do an LO with a 5% option fee and monthly rental credit of $200 so that it pushes the rent amount to $1600 and thus be only $200 negative.
I am considering refinancing to lower the mortgage payment but is it worth it considering the prepayment penalty?
Your help would be greatly appreaciated
The purchase price was $252k. Based on a desktop appraisal
Based on your location and I am stepping out on a limb here since I know zip about your actual market, I am assuming that the house is in an appreciating area. You could L/O the house with 3%-10% or whatever you are comfortable with @ $1800.00- $2,000.00 per month with a $400.00- &600.00 per month rent credit for 24 months with an option price of $295,000.00 This would get you break even cash flow to a little negative (dependant upon taxes and insurance) and at the end you would based upon $1800.00 per month the $10,000.00 up front and an payoff check for $275,400.00. That is calculated by a $295,000.00 selling price, assuming that it will appreciate that much or more, less $10,000.00 option deposit - $9600.00 credit. Out of that would be your closing costs and payoff 2 years down the road. Your concern, and you will have to check your state laws, although there are plenty of Californians who may chime in here, is called equitable interest which here in Ohio is 3 years or 20% equity. Then you have to foreclose instead of evict, which is much more time consuming and costly. But if you keep it under those terms, you should be alright.
Good Luck,
Shawn(OH)
Why the low sale price? I thought on a lease option it is not unreasonable to raise the asking price well above market value. If the current value is $289k and I L/O with the option at 24 months then I would think that the market would easily take it above $295k. With that said shouldnt I price it higher than that?
I know I can do whatever I please but I just want to know if my offer would be unreasonable.
You can price it as you like, I was just citing the structure. I have no Idea what the house will be worth in 24 months and depending upon your ultimate exit plans, you may want to price it so that your tenant can't buy due to LTV. Depends on whether you want to be greedy, get full value, or want to create a win win, or just want out of the house. Remember, I'm half way across the country. I do wish you the best.
Good Luck,
Shawn(OH)
Got it. Thanks for the advice