Lease option

[Jaime Frausto]

Hello I have a potential customer that has been approved for a Short sale on his current home.  (he is upside down big time- owes $220K worth $105 ) and has $15K to put down on a house.  I am looking into purchasing a home to sell to him with a lease option for 2years.  My question is does the rent that he gives during the 2 years does it come off the agreed sale price or is the rent just straight income to me?

Any advice is appreciated. 

[William Hochstedler]

In my experience, having any portion of the rent go to principal is a can of worms.

We've seen deals run into problems when the optionee tries to perform on the back end with conventional financing.  Payments toward principal cause nothing but grief.

We tell optionees that if we were to apply payments to principal, the payments would be higher.  They should instead save this money and work on rebuilding their credit.  And, if something should go south, they are not out that extra money as well.  They are usually ok with this.

We've purchased several properties for optionees and done quite well with it.  Just make sure that if you're the buyer, you purchase it like you would any other RE investment.  We would look for a much bigger equity spread than @Jay S. 's example in case we're stuck with the property.

Wm