Posted by JohnBoy on May 01, 1999 at 10:46:25:
You draw up a lease-option contract showing the 5% ($8745.00) as “Non-refundable option consideration”. Use separate contracts, one for the lease and one for the option. Show the option consideration paid in the option contract. Also show the tenant would receive a $200 a month rent credit in the option contract, IF the tenant exercises the option. The lease should be a separate agreement not pertaining to an option.
Something doesn’t sound right with your numbers on this deal. If your only putting down only 5% on a $174,900 property and your payment is only $1100 then that means your getting this loan for under 7% interest. And that’s not even accounting for closing costs, monthly taxes, and insurance.
Also you would be buying this property as a non-owner occupied which is going to be an even higher interest rate especially with only 5% down. My guess is the monthly PITI on something like this is going to end up around $1800 - $2000 a month on a $174,900 property. The 5% your putting down will be eaten up in closing costs unless the seller has agreed to pay all the costs.
What is the interest rate on your loan going to be? What are the taxes on this property? Who’s paying all the closing costs? Are you going to be using a broker or a bank? What kind of points will they be charging you to do the loan?
What happens if your friend defaults on the payments? Are you in a position to get stuck with the payments until you get him out and find another tenant to l/o to or until you resell the property?
What is this house worth? Will you be paying retail or is this way under market value where you would be getting plenty of equity in the deal should your friend default on the payments, allowing you to recoup all your costs that will be involved so you can come out ahead on this deal?
I wouldn’t want to put myself in that kind of a position on a deal where I’m going to be the one responsible for a $175k mortgage where I’m only going to get $200 a month for my risks involved. Not to mention risking a friendship if your friend defaults on the payments.
Your friend should try and find a motivated seller that would be willing to carry back a 15%-20% second with his 5% down and get his own mortgage. Or find a motivated seller that would l/o their house to him or sell on a contract. My impression on this deal based on your post sounds like your friend has found a house that he “wants” so bad, that he’s willing to risks a friendship by getting one to finance the home for him so he can get want he wants instead of getting what he can get on his own. He’s asking a lot for a friend to sign their name to a $175k mortgage and to trust him to make the payments while he already has a history of bad credit.
Unless this house is worth at least $200k and is in execellent condition needing no repairs, and I was going to get at $5k-$10k up front in my pocket, plus $300 - $400 a month cash flow out of it, I wouldn’t be interested in doing the deal.
My advice would be not to do a deal like this with a friend unless your willing to risk your friendship over this and risk getting stuck with the property and possibly end up losing money out of your pocket in the end.
Sorry to sound so negative about this, but to me it’s just not worth risking a friendship or even the risk involved based on your numbers your giving.