Best way to owner finance?

Question

I'm curious what some of our BP experts experiences is with structuring Lease Option, Rent To Own, or other owner financing deals when it comes time for the buyer to get financing. (yes I realize that most of these deals never get that far) My biggest concern is, with all the new banking reg's.  Has anyone bumped into issues with a lender when it comes time for the buyer to get financing? If so, what have they been?  I realize not enough time has lapsed between some of the new reg's. and refi periods for some have not come due, in this case, do you foresee any issues with it?

Bill Gulley · Answer

Robert, I see, sorry, might do some searching here as such issues are pretty well covered.

The allocation of equity in a lease option has been pretty consistant and is assessed at the time of loan application/appraisal. The appraisal will have a fair market rent for the subject property and any amounts in excess of that will be considered toward the option price. It's a difficult number to know 3 or 4 years prior! That's why you should not do rent to own stuff on one contract but a L/O, a lease and a seperate option agreement. You can finance the option price.

Installment contracts and notes will apply the principal paid.

A down payment is credited, if you deal is longer than a year to the refinance, the source of funds won't matter, within 12 months you may need to document the source of funds. For example, if the borrower borrowed the DP, that's fine if that loan has been fully paid off, if not you'll have problems in most cases.

Fannie and Freddie underwriting guidelines are on-line, IMO for one to be able to do seller financing correctly (not relying on luck) they need to know the rules of the game, those are the basic requirements that need to be met in the future and then you access the buyer's ability to meet those requirements in the future. That should be the main goal and determine the length of the contract, how long is reasonable for the buyer to meet the requirements to refinance the deal.

Good luck

Stephen Chatto · Answer

When selling on a lease option, It works for me either way.

If they can purchase then great, I get my chunk of cash and they get into the home.  Win-Win

If they can not close on the purchase, I still get my monthly cash flow, I still get my write offs, and I have tenants who want to own the place and treat it like their own.  My Tenant gets to live in the home that they can not yet qualify for and the opportunity to keep doing what they need to do to eventually purchase the property.

I have not had any experience recently with how the banks will look at the down money and option consideration towards down payment money. I personally don't see the down payment money being an issue as much as them getting their credit cleaned up to the point where they can qualify.

At then end of the day if the option consideration is reasonable and the monthly credit is reasonable I don't see it being too much of an issue with documentation.

If you try to say the tenant gave you 20K up front and the entire rent payment goes towards the purchase price they may be concerned.

-Stephen Chatto

Robert Littke · Answer

I see I wasn't clear. I say "regs" as a blanket statement because I'm not always clear if the scrutiny of down payment, (amount and source), allocation of rents or option fees, determination of value and length of ownership, etc. comes from the underwriters themselves policies or if it's a trickle down from HUD, FHA etc.

Bill Gulley · Answer

I don't see any banking "regs" really being an issue as most are stalling deals within 90 days, it's the lender's underwriting that is an issue and this is something that always has been an issue but not so much in the secondary market as it is now. I'd say in 4 to 5 years things will be much better. Your buyer really needs to be qualified allowing time to cure any ills they may have under current ratios.

If by banking "regs" you're talking about the SAFE Act, that is an issue for any financing arrangement, just need to meet the requirements initially, allow plenty of time and keep close tabs on the borrowers toawrd the goal. Good luck