Posted by River City on November 07, 2002 at 10:11:19:
Also keep in mind that when doing a lease/option, that the lender will only allow the “excess” portion of rent to be applied towards the purchase. An example would be if the house would normally rent for $500 and you charged $700. $200 would be applied towards the purchase. Also, verify with a lender whether or not the money is taken off the purchase price or subtracted from the down payment. Most people going into a lease/option think that the money would be applied towards the down payment. This is not usually the case. It is usually subtracted from the sales price.
Are there any problems with this - Posted by Jeff M
Posted by Jeff M on November 06, 2002 at 08:19:36:
I have purchased a property that I am rehabbing for a rental. I am thinking of asking the prospective tenants if they might care to buy after 3 years of renting. Let’s say, for arguments sake, that I have bought this property, all cash, for $35,000. After 3 years, I would allow the tenant to purchase the property for $40,500, but I would credit them $100 per month for each month that their rent was paid on time (assume $3600 if all rents paid on time). I realize that if I let them build equity while they are renting, I will then have to FORCLOSE, rather than EVICT, if something went wrong, so I don’t wish to do that. My thinking is this… if the tenant is a potential buyer, they will take better care of the property, AND, I will be helping a low income person get started AND, this will give me an easy way to sell the property at an appreciated price after 3 years of ownership, when I anticipate I will be looking for “higher quality properties” rather than “high cash flow properties”. First, is this legal, and second, are there any legal/tax/other issues to concern myself with? The property is in PA. Thanks.
Re: Are there any problems with this - Posted by Tony-VA
Posted by Tony-VA on November 06, 2002 at 12:42:20:
For starters your numbers don’t give much “appreciation” or profit. If you only sell for $40,500 and give a rent credit of $3,600 you will only have $1,900 in profit after 3 years.
What it sounds like you are trying to accomplish is a Lease/Option. You could accomplish this by using a separate Lease and separate Option. You would use the Lease alone to Evict if they default.
Yes, a lease/option can give rise to an Equitable Interest argument and if the court agreed, then a foreclosure would be necessary. However your tenant buyer raising such an argument is more the exception than the rule. But in either case, you would want to build in sufficient profit and reserve funds to safely afford the worst case scenario.
I am not a lawyer and as always recommended, you should contact a local attorney.