Question about a Lease Option?

Question

Hello- hope all is well.  My understanding of a lease option is that the RE is tacking on extra month payments for the lease option tenants with the idea that after a set period of time (let's say 3 years) the tenants may exercise the option to buy the property at the set price 3 years ago. So, let's say the extra monthly payment was 300$. 36months later that's 10,800$. So, when the option is exercised, does the 10,800$ I've escrowed get returned to the lease option tenants.

Q2- If lease option tenants can't afford say-1800$ a month for the mortgage payment- thus defaulted and that's why an RE has swooped in--whats my "ahead of the game price" that is, my monthly what if the margin is only 100$ to me?? DOes this make sense??  I'm going to the gym to clear my head. :superman:

Account Closed · Answer

I have no clue what you are asking with Q2.

When someone pays consider to set up an option that money is generally paid as a fee and not refundable. It might be a credit if they do buy later. In either event you have earned the money when they paid it. If they exercise the option and the options says the money is credited toward the sale then that is what happens at closing. The funds are not held in escrow.

When someone pays a monthly amount in extra consideration (over an above what they paid to start the option) the rules are the same.

You can agree a credit or you can agree there is no credit for the money paid. Most of the time the extra money that is paid is agreed to be a credit towards the purchase. More likely to get someone to pay extra in that case. They are making installment payments except they have not committed to buy yet.

John Corey

Amy Vasquez · Answer

I have not done one yet (shame on me) but feel I have a good grasp...

If a tenant buyer is in good, upwardly mobile financial situation (ex they bought another home and this is the second one... they didn't need the cash out to buy house 2) then Lease Option is a good idea.

If a tenant buyer is in bad shape (your buyer, those about to be forclosed on, bad credit without a valid reason like medical bille, etc, etc) you need to do a subject to (get the deed) so you can be in control of the property fully and not relying on them to pay (as they have shown they are unable)

I would never allow the original owner to stay and make you payments on "their" house.  That's how they will see it, as "their" house.  My mother in law is in the middle of a situation with an old man who truly was scammed out of his house by an unscrupulous investor. He thought he got a new mortgage but what he really did was sell his house to an investor and lease it back.  Very sticky situation.  If the guy was required to MOVE, even feeble minded, he may have questioned it but now, lawyers are involved (mother in law is a traditional type realtor who has been trying to SELL this guys house on the MLS for a year... and its been SOLD to this investor since September!)

The Lease option should be paid UPFRONT.  If they can't do that, how do you ever expect them to pay the monthly rent, let alone BUY the house?  I wouldn't take the lease option in monthly payments. It's like letting someone move into a rental without paying a security deposit.  If they don't pay that security deposit, don't pay the rent, trash the place and move out well, you don't have that security deposit to repair things.  The option fee is kept in your bank account but does get "taken off" the purchase price if they exercise.  If they don't exercise their option, it's yours.

Monthly rent credits can be 0-100% depending on how YOU structure it. Some investors go say $100/month, some go 50%.  It's just something to negotiate with the seller AND your tennant buyer.  Those rent credits do go toward the house purchase.

There are 3 forms to use
Purchase Agreement
Option Agreement
Rental Agreement (don't mention anything about the option or purchase in your rental agreement or "somehow" you become a mortgagor.  Not sure how that works exactly.

So the money in lease options come from
1.  Upfront Option Money
2.  Positive difference between rent they pay YOU and rent you pay the seller
3.  Back end money on the appreciation of the house (difference in what you buy it for and what you sell it for)

I would say this deal of yours might be a canidate for buying subject to their existing mortgage (if there is some equity and the terms are good) or in just a straight purchase at 70% of FMV but DEFINITELY NOT A LEASE OPTION!

I got my information from Wendy Pattons Lease option book and from going to one of her day long classes offered by my local REI club.  THeres another book I want to read that everybody says is great but I can't think of the name right now.  Any help on that one?

My husband just looked over  and said "are you writing a book?  I scrolled up and see that indeed I am  :lol:

Matheno Howell-Bey · Answer

You really want to do standard lease option rental agreement to equitable interest around the EI issue.

Steve Nicewarner · Answer

What exciting said

The reason you don't want to combine the lease and the option into one document is that the option gives the tenant-buyer an "equitable interest" in the property [his right to purchase means he has rights relating to the property]. If he has an equitable interest, then kicking him out is a foreclosure instead of an eviction. Foreclosures are harder and longer to do.

If you keep the two documents separate and never have the lease refer to the option [having the option refer to the lease should be all right], then you have a chance to kick a deadbeat out without having to go to Superior court.

As for books, I suggest "Buy Low, Rent Smart, Sell High" by Scott Frank and Andy Heller

N/A N/A · Answer

I freelanced and denoted RE as real estate investor I believe the correct denotation is re.   Ryan Webber (RW) if okay wit you is correct. Flipper 101 I see the realty of them probably defaulting agian.  Paying the extra ontop of the mortgage was my thinking of how to set up a lease option.  Sounds like this may be inncorrect logically and realistically. I'm catching on and don't want to go into anything sideways.
Thanks for the straight poop :wink:

Ryan Webber · Answer

Okay, I think I might see what's going on.  :wowie:

So someone is defaulting on their mortgage, and you are looking at doing a lease back with an option for them to buy the property back.  They can't afford $1,800 a month and are getting foreclosed on, and you (the RE, RE investor I think) are trying to figure out what they can afford so you can lease option it back to them?  It sounds like you are wanting to set it up so that they pay extra on top of their lease amount to go towards their option fee probably because they don't have any money upfront to put as an option.

Is this what you are asking about?  Well, let's assume that it is.

First off, helping people in a pre-foreclosure situation is like helping crack heads who just got out of rehab.  :shock: 
Expect them to default again.  Its a long hard road to break bad financial habits, and most people aren't going to change them just because you help them save their house.  It will take years for them to recover and get their head straight if they ever even do so.

So when figuring how much they can afford, I'd probably talk to them about what they think they can afford and why.  Normally less than 1/3 of their take home income is a good place to be, but understand that there is probably a 90% chance that they will default within a year whether the payment is $1,800 or $1,500.  They are a very high risk tenant/buyer.

In reference to trying to get extra money each month to go towards an option fee, well, good luck.  I think you need to be realistic in understanding that you might get whatever they have saved up from not paying their mortgage for several months, but other than that you probably aren't going to get much more out of them without them defaulting.  Maybe you could set it up as an optional option fee payment, and once they paid a certain amount they could exercise their option.  I haven't done many lease options and maybe someone else could help with actually setting that up.

N/A N/A · Answer

Yes, Q2 was a brain fart--- simply, how do I set the monthly rent plus the extra consideration per month  as part of the lease option payment?  If the guy is being foreclosed on because he can't affort 1,800$, how low do I go for a monthly rent that he can handle  and still get the extra lease option payments?