Option Consideration Fee - Posted by Kate (VA)

Posted by JohnBoy on November 27, 2000 at 16:58:34:

That’s up to the lender. They can regard it as what ever they want. You are NOT getting a down payment from the tenant. They are NOT even buying the property. They are only LEASING the property from you. In addition to LEASING the property you are SELLING them an OPTION to buy it at a preset price by a predetermined date. The money they PAY you for that OPTION is in no way a down payment towards buying the property. It is ONLY “Option Consideration” which is NON-REFUNDABLE should they NOT exercise the OPTION for ANY REASON.

A down payment towards buying something serves only one purpose. To BUY it. They are NOT buying, they are only renting with the OPTION to buy.

If you were to say their option consideration will apply towards the down payment, what happens if they can’t get a loan? If they can’t get a loan and are unable to BUY the property, then they would more than likely say they want their “down payment” back since they can’t buy the property. They may decide to take you to court claiming that money was towards a down payment and since they can’t get a loan anywhere they should be entitled to getting the down payment back!

I’d would much rather be in the position to show they NEVER paid anything towards a down payment. They ONLY paid consideration for the RIGHT to buy the property, NOT an obligation to buy it.

Depending on the lender, they may say no! We won’t allow it as part of a down payment and they will only treat the balance owed to exercise the option and close as the purchase price and require a down payment based on that amount. If that were to happen, find another lender that WILL accept the buyers option consideration to be used as part of their down payment.

Option Consideration Fee - Posted by Kate (VA)

Posted by Kate (VA) on November 27, 2000 at 13:44:01:

When doing a lease option, is the option consideration money a straight fee or is it applied towards the down payment if the option is taken?


Re: Option Consideration Fee - Posted by JohnBoy

Posted by JohnBoy on November 27, 2000 at 14:58:05:

It is a straight fee paid as consideration for giving the option. If the option is exercised then that amount is deducted from the “purchase price”, NOT applied towards any down payment. Some lenders will allow that to be used as part of or all of the buyers down payment, but as far as you’re concerned it’s deducted from the “purchase price”.

Do not even use the term “down payment” in your contract. What if they couldn’t get a loan? They may decide they want their down payment back. Might be a little hard to convince a court you should keep someones “down payment” money when they can’t get a loan to finance the balance! Better to word it so it applies towards the purchase price “IF” they exercise the option.

Re: Option Consideration Fee - Posted by Mrs SD

Posted by Mrs SD on November 27, 2000 at 15:37:58:


So does that mean that they have to come up with a separate 10K or whatever amount they’d need for a downpayment at the time that they exercise their option?

Mrs SD

Re: Option Consideration Fee - Posted by JohnBoy

Posted by JohnBoy on November 27, 2000 at 16:00:19:

That would depend on the lender they go through, how much they qualify to borrow and how much of LTV they can get.

If the option price was $100k and they paid $5k option consideration they would need $95k to exercise the option and buy the house.

If they were able to get a 95% LTV they wouldn’t need to come up with more money assuming the lender allows them to use their option consideration as their down payment, which they shouldn’t have a problem with.

If they could only get 90% LTV then they would need another $5k to close or you as the seller could agree to carry the difference as a second.

If you have a GOOD mortgage broker to work with you can get your tenant/buyers pre-qualified or see what all they would need to do over the next year in order to qualify for a mortgage. That’s assuming the loan program available today is still available in 12 months from now. That’s the one thing no one has any control over which is how the lending guidelines could change from one day to the next. Assuming they do everything they were suppose to do as far as paying on time every month to establish payment history, cleaning up any credit problems, paying down some high debt on credit cards, etc. then finding a lender shouldn’t be much of a problem when the time comes.

But, JohnBoy… - Posted by Mrs SD

Posted by Mrs SD on November 27, 2000 at 16:15:24:

How can the option consideration be regarded as a downpayment if the investor has expressly avoided using that term (downpayment) on any documentation?

Mrs SD