Lease/Option Question - Posted by Todd

Posted by JohnBoy on November 02, 1998 at 12:56:18:

A lot will depend on the lender. In most cases a lender will treat a l/o as a refinance instead of a purchase. A lot will depend on the loan programs available at the time the tenant exercises the option. If the lender will only allow an 80% LTV against the property the property will have to appraise for enough to cover the 20% difference.

Example: You l/o the house with an option to buy at $100k. The tenant put $5k down as option consideration. The tenant will need to come up with $95k to buy the house when they exercise the option. If the property appraises for $100k then the tenant would need a lender that offers up to 95% LTV on a refinance. If the tenant could only qualify for 90% LTV then they will be $5k short. They either would have to come up with another $5k, or you could carry the $5k as a 2nd mortgage. Some programs will allow 100% LTV and you wouldn’t have a problem as long as the property appraises for the balance owed. If the property was to increase in value and appraise for $115k in a year then the tenant would have $20k in equity. This would put a new loan at 83% LTV when they go to refinance.

The best thing to do if your concerned about the tenant being able to get financing and how much of a LTV they would be able to get is to find a good loan broker and have him look over the tenants credit and income to see what kind of program he could use to refinance them in a year. Sometimes you may find out the tenant could qualify for a loan now instead of waiting a year to qualify. Then you could sell the house now and cash out of the deal with all your profit up front.

Lease/Option Question - Posted by Todd

Posted by Todd on November 02, 1998 at 10:58:31:

This is probably a dumb question, but I can’t seem to find the answer anywhere. If I Lease/Option a property and sub-Lease/Option it out, does the option money that the subtenant paid me count toward the DOWN PAYMENT, if they exercise, or JUST the purchase price? In other words, will the subtenant have to come up with a another 3%-5% (plus closing costs) when they exercise? Does it just depend on the lender?

Re: Lease/Option Question - Posted by John OH

Posted by John OH on November 03, 1998 at 01:18:58:

It is up to the lender as to whether to allow it. It’s up to you to help his decision.

It depends on what you want to happen. If you want to lease the house for the option period, keep the tenants’ deposit, and re-L/O it, you want to make it as hard as possible for the tenents to exercise the option. The deposit not being part of the down payment would make it harder.

If it IS going to be part of the down payment, you and the lessor have to establish a paper trail to prove to the lender that the lessor paid the money to you and when. I usually have them get a separate money order or bank check for that amount. We then keep their bank withdrawal slip, a copy of the check, and my deposit slips.

Not being able to produce this paperwork might cause the lender not to allow the deposit as down payment. Not keeping it is what to do if you don’t want it. This doesn’t seem fair to me, so I always make it part of the down payment.