Is it worth it - Posted by Pru

Posted by David Krulac on April 28, 2000 at 11:05:43:

they may have a percentage say 3% of sales price as the most a seller can credit to the buyer. other lenders may only allow seller to pay certain of the buyers costs by the item’s name. in either case the lender or the secondary market may place limits on the credits and if they think that the rent is market may give the buyer ZERO credit.
David Krulac

Is it worth it - Posted by Pru

Posted by Pru on April 26, 2000 at 13:30:19:

I bought a house at auction with closing costs, everything included for 86,600.00. I just sort of want out of the house. Someone has offered me 92,000.00 with 3000.00 option money and 825.oo per month rent. 2 year L/O. 10% rent credit. My pymt. is 762.00 taxes/ins. included. Now at the end of two years, if all rent credit are applied the balance for them would be 87,020. It seems to me all I would be making is 3420.00, and any benifits from taxes, is this a good deal? I know they are good pay and I would receive monthly payments. What should the spread be and how do you figure it? Help, Help.

Maybe… - Posted by B.L.Renfrow

Posted by B.L.Renfrow on April 27, 2000 at 08:43:01:

Dave T has given you some excellent advice below.

You didn’t say how long you have owned the property, but I am assuming your loan balance is pretty close to the $86,600. Have you checked comps to arrive at the actual FMV? Remember, because you are offering the property with terms (the lease-option) you can set your price a bit ABOVE FMV.

Also, I agree that for this price range, $3k is too little option money for a two year term. I’d only go with a renewable one year agreement, with additional option money if the T/Ber elects to renew.

Finally, what will your market support for rent? As with the purchase price, your incoming rent payment should be a little above market. If they can’t afford above $825, then I’d bag the rent credit. As a general rule of thumb, I like to see a MINIMUM positive cash flow of $100 per month on my L/Os - ideally, greater.

Here’s what you might do:

If FMV is $92k, set the T/Bers purchase price at $95k on a one year L/O. Assume the same $3k option consideration (BUT…with ADDITIONAL option consideration if they renew in a year). If the market will support a monthly rent of only $800-825, or if that’s all the T/Ber can afford, then NO rent credit. If they are stuck on the 10% credit, raise the rent to maintain your cash flow.

So if they exercise in a year under this scenario, you’d receive a sale price of $95k, minus $86k loan payoff (approx), leaving a back end profit of $9k. In addition, you’d have the $3k option consideration, plus cash flow of $756 ($63 X 12) using your figures…for a total profit of almost $13k, less any closing costs you’d have to pay.

Brian (NY)

Not an expert, but some observations - Posted by Dave T

Posted by Dave T on April 26, 2000 at 18:14:40:

First, your rent credit is greater than your cash flow. If you are paying $762 every month and only getting $825 in rent, then your monthly cash flow is $63. A 10% rent credit means you are giving away $82.50, or $19.50 more than your cash flow each month. I suggest that you get “rental” comps for your property. If similar properties are renting for $825 per month, then you shouldn’t need to give any rent credit. I propose that you only give a credit for any premium ABOVE fair market rent.

Second, your lease option period may be too long for only a $3000 option consideration. Suggest making the option period only one year. At the end of the year, you can always enter into a new option agreement for another year upon payment of an additional option consideration AND set a higher sale price. As a seller, I would think that you would want your option period to be as short as possible. As a buyer, you want your option period to be as long as possible.

Third, if you agree to a two year lease/option term, set the sale price higher. What is the FMV of this property? If you bought at foreclosure below FMV you shouldn’t give away your equity by setting your sale price too low. For this discussion, let’s say the present FMV of your property is $87000. In one year, with a modest 5% appreciation, the property should be worth $91350; in two years, $95917. Make sure that your sale price takes the future full market value of the property at the end of the lease/option period into consideration.

Rent credits - Posted by Ben (FL)

Posted by Ben (FL) on April 28, 2000 at 06:47:03:

I agree with everything you just suggested. However, I have been told be several banks, mortgage brokers, and FHA that, if the tenant/buyer is planning on getting financing and using the rent credit as down payment or principal reduction, the lender will only consider the amount of lease payment above market rent. So, if the market rent for this house is $850, and the Lease amount is $860, the bank will apply $10 per month of the lease toward the purchase price or down payment, only. The key, here, is who determines what “market” rents are?