Posted by Herb VanDyken on September 08, 2010 at 20:52:48:
Michaela gave a pretty good answer but rather or not a new lender would consider 75% of the rent towards your monthly income is from the olden days. Not to long ago really. Lenders now want 1 - 2 years seasoning before they would even consider it. An alternative would be to get financed for a new mortgage from a credit union or locally owned small back. Personally I’d rent, I to agree that prices will continue to drop. IMO. Herbster
Lease Option to get out of primary residence? - Posted by Patrick
Posted by Patrick on September 08, 2010 at 24:41:16:
Okay, so I haven’t posted here in a long, long time. I explored the REI world 5+ years ago but decided in the near - to mid-term I was better suited to explore other income opportunities. Anyway…
My wife and I bought our primary residence near the RE peak (mid 2006), though the crash hasn’t been nearly as terrible in my area as in many others. My wife now has taken a too-good-to-pass-up job in another city, now we need to sell the old house before we can buy a new one.
We’re not completely underwater on it, probably near 100% LTV though. By the time we pay the realtor, we will have very little savings left for a down payment on the next house, unless we dip into funds that we REALLY don’t want to touch at this point (rainy-day fund, retirement funds, etc).
We’ve been trying to come up with creative ways to make the best of this situation. One of those that we’ve thought of is to offer a lease option on the old property. Does this seem like a reasonable solution?
Our thoughts:
By securing a tenant, whose rent will presumably cover most of the mortgage and property taxes, we will be able to get a new mortgage on a new primary residence. Obviously we’ll need to do our due diligence to make sure lenders will be okay with this, and that our rent expectations are reasonable in this area.
By delaying the sale of the home, we’re essentially delaying the expense of selling, since it would be a net negative cash flow at this point.
By doing a LO, we might be able to get a higher price than a straight sale, if the tenant buyer actually exercises the option. If not, we do another LO, or try listing again with a realtor at the end of the lease term (or after eviction, gulp).
We could avoid the 6% realtor commissions, though we’d seek to somehow settle up with our current realtor at something less than the full 6%, as he HAS worked hard for us thus far.
Some of the many questions we’re thinking about:
Will the current mortgage holder make trouble for us if we got the loan as owner-occupied, now turn it into a rental? From their point of view, we’ve never missed a payment, and it’s a 30-year FRM at 6% held in-house by the bank that originated the loan. Would they be happy to just keep collecting on this (nearly underwater) loan rather than try to force us to adhere to the original terms of the loan? (Once again, due diligence will be required.)
While I’m not thrilled about the idea of becoming a landlord in this situation, I’m not terrified at the prospect either. The house is about a 3 hour drive away and we obviously are familiar with the property and the area, having lived there for four years. We also have family and friends in the very close vicinity of the property, which hopefully will help. It is also probably in the top 25% or better of homes in this town in terms of price. We hope that the price will weed out some of the less attractive tenant buyers.
So, I know there are lots of things that we missed (some of which I left out because this message is getting so long, and others that I simply haven’t thought of yet). I hope this forum is a good place to start getting other thoughts about the idea, though. I would greatly appreciate any insight anyone has.
Also, we are currently living, free, with family in our new city. It’s not a perfect situation by any means, but it also makes the disposition of the old property less urgent since it’s the only housing expense we have right now.
Thanks in advance for any help on this!
Re: Lease Option to get out of primary residence? - Posted by Henry Melair
Posted by Henry Melair on September 09, 2010 at 02:13:36:
Body of Message:
I think the other 2 answers have merit but you haven’t told us the state of the market where you are moving to. If its a weak market, you may be able to get a favorable option in addition to a lease and/or very favorable rent, etc. In other words, depending on the market at your new location, you may have some real opportunities to do something good for yourself and, if you’re going to be there a long time, you don’t have to rush in you can take the time to learn the market.
Regarding renting your current house. Again, it depends on your market. Many rental markets are soft and it takes a very keen eye to be sure you are getting a good tenant - something many agents don’t do well and something very difficult to do from afar. I concede it’s a tough call but 6 or 12 months of vacancy or 6 months of a bad non-paying tenant or one who is destructive or going out of pocket for a commission are not good choices. It’s tough to manage from afar, tough to find good managers to do it for you especially when they know you won’t be looking over their shoulder. I’d tend to sell and be done with it unless the rental market was strong and I was sure I could get competent management or I was sure the sales market was going to improve in a year or so.
Re: Lease Option to get out of primary residence? - Posted by Henry Melair
Posted by Henry Melair on September 09, 2010 at 02:11:50:
I think the other 2 answers have merit but you haven’t told us the state of the market where you are moving to. If its a weak market, you may be able to get a favorable option in addition to a lease and/or very favorable rent, etc. In other words, depending on the market at your new location, you may have some real opportunities to do something good for yourself and, if you’re going to be there a long time, you don’t have to rush in you can take the time to learn the market.
Regarding renting your current house. Again, it depends on your market. Many rental markets are soft and it takes a very keen eye to be sure you are getting a good tenant - something many agents don’t do well and something very difficult to do from afar. I concede it’s a tough call but 6 or 12 months of vacancy or 6 months of a bad non-paying tenant or one who is destructive or going out of pocket for a commission are not good choices. It’s tough to manage from afar, tough to find good managers to do it for you especially when they know you won’t be looking over their shoulder. I’d tend to sell and be done with it unless the rental market was strong and I was sure I could get competent management or I was sure the sales market was going to improve in a year or so.
Re: Lease Option to get out of primary residence? - Posted by michaela-CA
Posted by michaela-CA on September 08, 2010 at 24:54:50:
Ok, here are some of my thoughts off the top of my head;
Why do you feel the need to buy in the new city? I expect the values to further drop, so you might be better off renting for a few more years anyway. That also means that you don’t have to come up with downpayment cash now.
Why not sell your present house now as FSBO? You’re in a good position, if you can break even. If you wait a couple of years, due to tenant buyers (who normally don’t buy anyway) there’s a pretty good chance that the house is underwater then.
Even if you rent your house and try to buy another house, your new lender would normally only count 75% of your rental income (even if you technically cover your payments), due to vacancies, repairs etc.
Your present lender would probably not care if you rent the home as long as you make your payments, since you’ve lived in it since 2006.
Just my thoughts
Michaela