Rent Credits
Hopefully, somone can help me clarify rent credits. If I have a $1,000 payment and charge the tenant $1,200. Can I only apply tthe extra $200 or whatever amount I wish? With the understaning that what ever I apply as the credit comes of the purchase price if the option is excercised. Or did I just answer my own question? Any input appreciated.
"If I have a $1,000 payment and charge the tenant $1,200. Can I only apply tthe extra $200 or whatever amount I wish?"
Personally, the first thing I would do with the $1200 is to pay off the Mortgage so you dont screw up your credit and get the property taken. The second thing to consider is how many tenants will occupy this building? Is it a complex? Single family home that can be sectioned off into smaller rooms-say for older people?
The main thing to consider before you buy is if it is worth your time (time=$$$).
Hope this helped some.
Let me rephrase the question. how much should I offer to the tenant as a credit towards the down payment? I would use $1,000 to make the payment and pocket the other $200. Can I offer the tenant a 50% credit? And if I do, does it not just come off the purchase price set for when the option is excercised. Isn't the credit just a paper since the credit would come back to me at closing anyway.
hi,
First of all, what is the market rent for the type of property in the area? If the market rent is $1000, and if you are collecting $1200 per month, $200 should be the rental credit. The accumulated rental credit will be credited to the buyer, when they actually buy the property. The seller will receive proceeds net of rental credit at the closing. Hope this helps.
Why are you offering monthly rent credits? I only offer xx amount of dollars off the purchase price at closing if they have paid on time each month, not monthly rent credits. If they are late at any point, then the xx amount of discount at closing is lost . Hope this helps.
Prosperous investing,
td
TD what a great idea. I have been offering rent credits and never thought of it as simply offering to reduce the price by a certain amount at closing time.
Can someone tell me how you find out your area's fair market rent for my type of house? Thanks,
D
Quote:
On 2003-08-26 12:08, D_mac05 wrote:
Can someone tell me how you find out your area's fair market rent for my type of house? Thanks,
D
For your City, you can call any of the Apartment Finder companies and ask for a unit that is similiar to the one you are renting.
For your particular area, you can walk the street and ask the other renters with similiar houses what they are paying.
Lastly, there's the newspaper.
Use all three prices compared to your own unit to come up with a good price. For a reference point, I try to profit 2-3% the value of the house a month (after mort. note obviously).
Quote:
On 2003-08-25 20:08, beowulf13 wrote:
Hopefully, somone can help me clarify rent credits.
Perhaps you can explain why you are giving rent credits at all? Is it some kind of lease purchase situation?
As far as the extra $200, I recommend that you save it until you have a nice security for the house, in case of emergencies (roof , HVAC, BK). There is no good reason to pay down the mortgage.
Thanks for the info everyone!
My wife and I enjoy using a 3 year lease option, a loan servicing company, and an initial consolidated credit pull for the buyer(s) from our mortgage broker. With this approach, the broker offers to the buyer a list of “to do’s” to prepare them for purchase in 1 year. Any rent received late will immediately null the accumulated rent credit, and all payments will be applied to the rent. One month’s rent is received to purchase the option to buy. As a bonus to the buyer, if the home purchase occurs within year 1 the amount received for the purchase option will be applied to the rent credit.
In the Chicago suburbs (taxes are stable) 5-10 year old homes (keeps repairs minimal) where neighborhoods are established, we have had success with an agreement of:
Year 1 Fixed Rent plus $200 monthly rent credit = $2,400
Year 2 Fixed Rent increases by $25 per month & $100 applies toward monthly rent credit = $1,200
Year 3 Fixed Rent increase by $25 per month & $50 monthly rent credit = $600
This model will create the urgency to the buyer to purchase in the first year. As the investor/seller we have already agreed on a sales price, so this is the greatest win for both parties. My wife and I understand there is risk and additional “landlord costs” if the purchase occurs in year 3 verses year 1. When buyers see these levels of credits along with FREE feedback (mortgage qualification strategy) from the broker there is a positive response. If after 3 years they can not even qualify for FHA financing which only requires 3% down and a moderate Fico score, the odds of EVER qualifying are remote.
[addsig]
You can make the rent credit what ever you like.
I have some that offer No credit, or a set credit for the length of the term.
Others offer a credit that, combined with the mortgage payment, is greater than the rent coming in. (Ex. Rent $1200, mortgage $1000, and rent credit $500). This is just a paper credit, and the end sales price is ususally raised to compensate for the credit. So in the example above he's "losing" $300 / mo, but on a 1 year lease option would have increased the sales price by $3600 (300 x 12) - getting exactly what he wanted in the end.
Another wonderful thing to add to lease purchase agreements is that if they are late or have bad checks, etc, the credit will NOT apply for that month. On properties where you have the higher rent credit going back to them, this REALLY motivates them to get their checks in on time.
I have found that when a lease/optionee goes to exercise their option, and there is a rent credit involved, the loan underwriter will want the appraiser to prepare a "comparable rent schedule" to determine the fair market rent for the property. If you have been collecting $1200 per month with the notion of giving the optionee a $200 per month credit, but the fair market rent is $1200, then the underwriter won't allow the $200 credit to be applied toward down payment. The best option is just to use the rent credit to "buy down" the option price, which will only work out if you are prepared for it in the beginning. Nobody wants to be forced into giving up profit to get an optionee to qualify for mortgage financing.
After the first year in the home most non-conforming lenders will allow the purchase loan for the optionee to be structured like a refinance, with the option price of the home being treated like a mortgage balance to be paid off at closing.
Another lease/option tip: MAKE your optionees pay the lease payment with a personal check and tell them to get copies of their cancelled checks from their bank. Most banks do this for free or a nominal fee. Make copies of each check that you receive from them before you deposit them. Loan underwriters invariably want to see a 12 month history of on-time lease payments, and cancelled checks are the best (and usually only) method of proving the payment history. Money order's are iffy and if your optionee can't manage a checking account that's not a good sign. When the check is run through the banking system it is imprinted with the date that it clears on the back. I've had optionees who give me a check on the last day of the month and by the time it gets imprinted by the bank it is over 30 days late. The latest person to do this with me couldn't qualify for a bank loan because she played that game with me and lost 3 times in a year, which equals 3 payments over 30 days late.