Suggestions & Opinions, Please!
I've never done a lease/option, but am contemplating the following deal - would greatly appreciate input! I'm sure there are issues that I haven't taken into consideration...
couple recently sold house in pre-foreclosure, have been working hard at cleaning up credit and raising FICO in preparation for buying - actually have new house under contract, but are having little luck getting mortgage at decent rate at this point. they have indicated they are open to lease/option possibilities while they get credit situation cleaned up.
i'm considering buying the house they have under contract and L/O to them for one year - at that point, my mortgage guy tells me they will be eligible for VA and will easily get mortgage.
here are the numbers:
PP $238K (from FSBO), probable $3000 from seller at closing
current value of home, $245K - $255K
so i'm thinking option price in range of $245K - 248K, depending on whether i offer rent credits
they can put down $15 - 20K in option money
they would like rent to be roughly $1500 monthly which would cover my costs.
i think this would net me a bit of $$ and solve their problem as well.
thanks for any input you can offer!!
Hello K2,
This is one of those gut feelings type of things. You have to go with what you feel deep inside about this couple. Where are they going to get 15 - 20k? On the surface it looks like you can't go wrong with what you pose. How much of your money will you have to tie up and for how long? Put it to pen and paper and see how the numbers come out. Happy investing
I would look hard at why they were in pre-foreclosure before... was it bad luck... illness, injury, accident, death, layoff, or was it just money mis-management? Also, talk to legal counsel. Here in Jersey you do not want to tie up the property in anything other than a lease with the option being an add on,... this way no pay... it's an eviction, not a foreclosure. We assume the down pay is coming from the sale of the old house... so indications are they are making efforts to get back on track. Would those rent payments really cover your costs???? It wouldn't here in jersey but our taxes are probably much higher. You have to look at the "cost" of your down payment money being tied up ... Do the math ...consider all your costs: down pay, settlement costs, points, appraisal, taxes, home owners insurance, mortgage insurance premium, water/sewer, garbage, every cent you will be out of pocket... including on the backend - settlement costs etc.... now look at your markup on the house.... what is your return on your money? Is it worth the risk for the return or could your money be invested better in a different property deal? Every investor has their own benchmark. Consider best case and worst case scenario.
Have you ever been a landlord? Do you know how to screen tenants? Do you have any experience with L/O. Will you be happy with this arrangement if your prospective tenant/buyers were to walk?
Most L/O contracts ask for 2-5% down. Do your prospective tenant/buyers have this kind of money? I would get a non-refundable deposit from them prior to signing a sales contract.
Guess I am trying to understand your desire to do this deal. The money is not that great and the opportunity is not that great. Are you trying to help out some friends? You know the #1 rule of landlording is not to rent to friends or family.
Brenda
your buyer/tenant will be better off if rather than a lease/option you sell them the property on a land contract. Put in a one or two year balloon if you want (or better a bump in interest rate). In this way they are looking for a refinance loan a year or two from now rather than a purchase loan. Better underwriting terms.
Call the $15k a downstroke on the land contract rather than an option fee-- even if you jack up the price some so that the principle balance remains the same.
Mark
Listen carefully,
Stay away from these people! Come on, what are you thinking?
The only reason you posted here to ask for advice is because your gut is telling you to run!
These people have defaulted on mortgage(s) before so the banks do not want to deal with them and neither should you.
Legal fees alone will overwhelm you if they do not pay -- and chances are that they will not!
There is so much that I cannot possibly write about in terms of the risk you are taking by leasing to these people - very easily, if you do not stay away, you may find yourself being foreclosed on.
Being in financing for over 16 years, I see less than 5% of the people ever doing what rhey need to do.
I agree with the above poster. I don't believe they will qualify for a VA loan in one year. If they can get a mortgage now they should take it at any rate. That is the only way to show they are credit worthy. If they pay their mortgage on time for a year and clear up their credit they can refinance to a conforming lender with no problem.
If they are not taking this option then there is something wrong. Why would some rather pay rent than a Mortgage?
Lori
[addsig]
thanks everyone for all your input - being fairly new, i always appreciate getting different perspectives!
i will be trying to hook these folks up with one of the many L/O homes available around here - in the final analysis, i don't want to tie up my $$ for a year for a relatively small return.
someone mentioned gut check, and i have to say, i have a strong instinct that these folks will take care of business. but you never know...
thanks again!
karen
Best of luck Karen.
k2
Here might be the solution to your situation, an FHA loan for your borrowers, as long as they were not forclosed on and have a legitimate reason for getting behind on the mortgage (lost job,severe illness, etc.) and can document it you stand a good chance for approval, but first check what your loan limits in the property area are, and if thet doesnt work try Indymac they have a loan program of 100%cltv with 565 fico.
K2, have you given the thought that your real estate agent is pushing this deal so they can make the 14,280 dollars in commission. If you do this deal, why don't you come to Lexington and I will mentor you for a nice little fee of $4,500 for a week. It appear to be that you have money to burn, as long as you are giving it away, I may as well get a some of the action (laugh). Run don't walk away from this so called deal.
thanks for mentoring offer, vern - very generous!
there's actually no real estate agents involved - the seller is a fsbo and the lease/option folks are leads from my marketing campaign.