Options

[Craig 0]

Do you apply the option money in as part of the 50% rent credit?

[Adam King (MI) 1]

Craig,

The NON-Refundable Option Consideration is applied the same way as the rent credit if you word it that way.

Here's what we do.

 

Rent Credit Example:

 

There shall be additional consideration of $00.00 per month credited to Optionee as NON-REFUNDABLE OPTION CONSIDERATION. This monthly credit shall be a credit ONLY toward the down payment/purchase price of the property. The credit will only apply to months when the rent amount and any outstanding fees owed (in the attached Rental Agreement) is paid on or before the due date and in full.

Hope that helps,

Adam

[Walter 0]

Do you apply the option money in as part of the 50% rent credit?

<{POST_SNAPBACK}>

I may be a newbie, however I would never consider doing it based on my readings of all materials on RE unless it is your house that you are selling and you try to get as much as you can out of it.

 

Keeping them (deposit and rent credits) separately makes it simple and easier for both sides unless you chose to be hard on buyers....they lose 50% of their own money from the deposit. How would you feel ...look in the mirror...

 

I guess it all depends what is your market like. If you have a whole bunch of buyers flocking your house then you have to look at the demand vs. supply.

I would prefer to have many but smaller deals than waiting for one deal to happen.

 

Walter

[Adam King (MI) 1]

I think we need to clear something up here. Rent Credits are extra option consideration. So option consideration and option consideration are the same thing. Unless I'm missing something from the question?

My answer to Craig's first question may have well been "Yes". And for the record, we don't collect security deposits.

Not sure if that's what you're looking for?

Adam

[MichaelC 160]

Craig, your question seems to have created a few more. Could you clarify it, please? Thanks.

[Sold ! 0]

My take:

 

Option money is Option Money. Period. It is applied in full toward the purchase price of the home. Whether the eventual lender will credit it toward the DOWN PAYMENT is between the buyer and the lender and very much dependant on the lender's policies. Therefore, never represent that it IS credited toward the down payment.

 

Rent Credits are rent credits toward the purchase price as well. Never say that it is toward the down payment because, again, it may not be depending on the lender.

 

The question is a bit ambiguous, but there's the book answer to what I think you are asking.

[Adam King (MI) 1]

Rich,

 

Whether the eventual lender will credit it toward the DOWN PAYMENT is between the buyer and the lender and very much dependant on the lender's policies. Therefore, never represent that it IS credited toward the down payment.

 

I disagree, but I think it's because we need to be a little clearer.

 

Any option consideration that is credited towards the purchase/optionee at time of closing can only be done by the Seller. Not the lender. It is called seller concession. But I agree that certain lenders may not allow for this because of issues such as seasoning and gifts. Either way in creative real estate it sometimes can be done without committing any kind of fraud.

 

We need to just be clear in our contracts that option consideration and or rent credits ARE to be ONLY applied to the purchase price (By seller concession or by knocking it down) and will ONLY be applied if the tenant/buyer successfully performs all conditions and obligations to the lease and option agreements. I also believe that most of our agreements leave this open by saying that the consideration may only be applied the sale/down payment of the property IF PURCHASED.

Hope that helps a little,

Adam "Been to court and knows better" King

[Craig 0]

Craig, your question seems to have created a few more.  Could you clarify it, please?  Thanks.

<{POST_SNAPBACK}>

If a T/B chooses to purchase the home. You apply 50% of as rent credits. Got that.

 

Of the Option money (example 3% of house purchase) do you also apply 50% of that money at the close? Or ddo you apply 100% of the option money.

 

Did that help or hinder?

[Mr Saint 0]

If a T/B chooses to purchase the home. You apply 50% of as rent credits. Got that.

 

Of the Option money (example 3% of house purchase) do you also apply 50% of that money at the close? Or ddo you apply 100% of the option money.

 

Did that help or hinder?

<{POST_SNAPBACK}>

 

 

Graig,

 

If you are offering a 50% rent credit, then 50% of each monthly rent would be applied to the purchase price...I think you've got that part.

 

The option money, however, is applied in full (100%) toward the purchase price.

[MichaelC 160]

What Mr. Saint said, Craig.

[Craig 0]

What Mr. Saint said, Craig.

<{POST_SNAPBACK}>

 

How to get a forum up in arms before the BIG MEAL. Everyone have a great Thanksgiving. Thanks for all the quick replies.

[<Steve> 82]

To play devil’s advocate here…

 

I see Option consideration as part of the down payment. Option consideration is similar to earnest money in a conventional real estate deal. There is actually $$$ being exchanged for the sale of the house. And yes like earnest money 100% applied to the purchase price.

 

Rent credits are that, credits. No $$$ are involved.

 

The bottom line is that it’s up to the lender what would be considered part of the down payment; however, I would have to argue that the option consideration is part of the down payment as a cancelled check is proof of money paid.

 

<S>

[Adam King (MI) 1]

Steve,

Good points.

Here's a couple more to ponder.

When's the last time someone closed (SOLD) a LO without a purchase agreement? I.e. just a rental and option agreement? (Lender's won’t let you do that)

What ever is on an option agreement is transferred to the purchase agreement through the original negotiation/conditions of the optionee and optionor. And whatever agreements talk about consideration and credits are also transferred into the figures of the PA. The lender doesn't know a damn thing about option consideration or rent credits, they only know about sale price and seller concession. And trust me, they don't care. (This does not apply to land contracts)

 

Another point. No money is usually transferred for the appliances, but they're always sold on the same purchase agreement.....hum.

Just a couple more things to make us all think.

This was a good thread because Craig didn't convey his question well enough. Kinda funny how things work.

Adam

PS

I see Option consideration as part of the down payment.

I agree, but only as a future "possible" purchase. A down payment can be refundable, but consideration is consideration. It is a consideration of good faith. If that faith is broken, the consideration stands as damages to the optionor. But I do agree, a lot of judges see a consideration as a down payment. We have to just be careful that everyone understands that an option is NOT a purchase. Otherwise we'd be adding the additional conversation of needing a license to this thread.

[Akinwale 0]

Steve,

Good points. 

Here's a couple more to ponder.

When's the last time someone closed (SOLD) a LO without a purchase agreement? I.e. just a rental and option agreement?  (Lender's won’t let you do that)

What ever is on an option agreement is transferred to the purchase agreement through the original negotiation/conditions of the optionee and optionor.  And whatever agreements talk about consideration and credits are also transferred into the figures of the PA.  The lender doesn't know a damn thing about option consideration or rent credits, they only know about sale price and seller concession.  And trust me, they don't care.  (This does not apply to land contracts)

 

Another point.  No money is usually transferred for the appliances, but they're always sold on the same purchase agreement.....hum. 

Just a couple more things to make us all think.

This was a good thread because Craig didn't convey his question well enough.  Kinda funny how things work.

Adam

PS

I see Option consideration as part of the down payment.

I agree, but only as a future "possible" purchase. A down payment can be refundable, but consideration is consideration. It is a consideration of good faith. If that faith is broken, the consideration stands as damages to the optionor. But I do agree, a lot of judges see a consideration as a down payment. We have to just be careful that everyone understands that an option is NOT a purchase. Otherwise we'd be adding the additional conversation of needing a license to this thread.

<{POST_SNAPBACK}>

 

So just to make sure I got this myself: When we talk about rent credits and option consideration with the Seller's and/or TB's, we should just state that the RC's and OC will be applied in full to the purchase price....

 

Is this correct? Is stating that the TB will have a certain % available to them as a down payment at the time of purchase, the wrong statement to make?

 

I just want to make sure I got my script clarified.

 

Thanks,

 

Akin

[Adam King (MI) 1]

Akin,

No problem, here's how it works with us. If you put a certain amount of OC or RC in your contracts, that's what comes off the sale price at the time of purchase. Yes, you can negotiate whatever you want with the tenant/buyer (How thre credits and option are applied) if they're willing to work with you after that, but their credits and consideration are still contractually theirs.

 

Example:

1. $5K down (Money out of pocket from tenant/buyer)

2. $400.00 a month rent credit (Say it's 50% of an $800.00 a month rent)

3. Tenant/buyer pays on time all the time and cashes out in 12 months. Sale price is $100K

 

$5K plus the 50% rent credit of $400.00 a month X 12 months= $9,800.00

 

Purchase examples:

 

A. $100K minus $9,800.00 RC and OC = $90,200.00 (Lender loans $90,200.00)

 

B. $100K purchase price with $9,800.00 seller concession. Lender is willing to only loan 95% LTV but no more and has no issues with where the money down is coming from or has no seasoning issues with that money.

 

In example "B", the seller and tenant/buyer can negotiate between themselves the remaining $4,800.00 after the seller concession of $5K. This can be subtracted from the price, or more normally used for closing costs paid by the seller.

 

This can get pretty complicated, but the way we ALWAYS do it is simply tell the title company what the dollar amounts are and where to put them. Once they give us the pre-settlement papers, we work out numbers to create the HUD. Everyone always knows what's going on before closing.

My honest opinion, you just need to know what goes to the tenant/buyer in your contracts. Make sure it's ALL NON-REFUNDABLE and the rent credits are JUST CREDITS! I NEVER make it look like I'm getting extra money each month. The rent is the rent.

If you know this stuff, get out there and do the deals. I don't worry about closing until it happens. And then there's plenty of people around to tell me what to do.

Hope that helps,

Adam