Re: Lease with option to buy. - Posted by Thomas M.
Posted by Thomas M. on August 03, 2006 at 09:29:54:
Should probably walk away from this one Juliet for several reasons.
Your 500 score person is offering little more than any renter, and offering a lot more complexity and risk to the Investor, so why would an Investor do it?
There’s never more than one thing wrong with any property that’s not sold within 10 weeks. The price. So it’s not really worth $135K in today’s market.
So he hasn’t found a killer deal. I’m finding better in the MLS through realtors.
The 3,000 is more like first and last months payments of a renter, not a buyer. Generally more than 25% is expected to compensate for the risk of someone with dubious credit.
His low score also brings to question whether he’ll even make the 2nd payment. So he might not even be a good tenant. The Investor might likely have to go through the time and expense of eviction, which is vague on a lease option contract. Legally, it’s more complex than a rental. It could cost him far more than his profit, never mind the daily aggravation for months, or possibly years.
$3,000 barely covers the closing costs. So now the Investor has to come up with any down payment, or have killer credit to get 100% financing, which is expensive.
So assume the Investor finds a program that allows 10% down, and puts up $13K, financing $122K, the Investors loan payments are approx. $700 / mo. fixed for 3 yrs. Then add taxes and insurance, etc. What if this 500 guy can’t buy it in 3 years? Now the Investor has to go through the expense of a refi, or take an adjustable roller coaster, probably heading higher than today’s rates. Or try to sell in a market probably slower than today’s.
Ther’s also a good chance prices will lower for the next 10 years or so. So the Inv. will see depreciation until then.
Even if all works as planned, the Investor’s best case is to make approx. $11k over 3 years on his $13K. Not bad, but he can do better elsewhere.
Would you do and risk all this if you were the Investor?