Option Money and Rent Credits

[Shar NJ 1]

Hello All,

 

I know I saw a thread about this but I can't seem to find it.

 

Is the option money on a SLO applied to the down payment or purchase price? Does it show as earnest money on the HUD-1?

 

How about rent credits? I believe they are a seller concession towards closing costs? Is the how it shows on the HUD?

 

On a CA, the option money goes towards the purchase price only am I correct? EXAMPLE-- I go under contract with the seller at $200,000 and sell to the buyer at $206,000 to cover option money and rent credits.

 

What I don't understand is how the option money is attributed towards the down payment or purchase price at settlement.

 

Thank you,

 

S

[MichaelC 160]

Is the option money on a SLO applied to the down payment or purchase price?

Depends on what the mortgage applicant's lender will allow. They are assured to receive credit for any option money in one form or the other, but that can't be determined until the t/b speaks with the lender.

 

How about rent credits?

These are usually applied as a credit towards the purchase price that is stated on the Option to Purchase Agreement. If that price is, say, $300K and the rent credits total $20K, then the purchase price would be adjusted to $280K.

 

On a CA, the option money goes towards the purchase price only am I correct? EXAMPLE-- I go under contract with the seller at $200,000 and sell to the buyer at $206,000 to cover option money and rent credits.

That is not necessarily a correct assumption, Shar. As I said above, how the option money is applied will be determined by the lender.

In a CA, the homeowner agrees to a net price of $200K. But for him to receive this at closing, the price to the t/b is, say, $215K. This covers the option money you pocket and the rent credits. The homeowner gets his $200K price as promised and the t/b has his purchase price whittled down $15K due to the rent credits received and the option money he has already put down at the beginning of the lease.

[Shar NJ 1]

Thank you Michael for your quick reply, I appreciate your help!

[BTI 7]

I really wish the policy of giving credit for the option money would change. I almost wish I joined the bar instead of adding broker to my investor hat. Some new hotshot attorney could make a great living off unexecuted lease options. Pure option money is non-refundable, it pays for the option only, but you can make it refundable by allowing it to become considered earnest, or down payment money.

 

Yes, it is easier to tell a tenant buyer you will credit his option money to the purchase price but I suggest you give it back to him through rent credits which separates it from the option and don't refer to the option at all. But take the extra minute and say this is how we handle it for legal reasons in order for you to apply your option payment toward the purchase price when you buy.

 

And once again I wanted to upchuck at the suggestion to enter a consultation agreement, and the suggestion the fee be based on a percentage. You lost your position as a principle in the deal and like it or not your consulting is a licensed activity and it would be a slam dunk case if caught. Maybe even thrown into the practice law and the bar can get you as well as the real estate commissioner. I can hold up banks all day long and it's legal until I get caught, and if the statute of limitation expires I can even go into the police station and confess all day long. So play it safe and do it right and enjoy life in the sandbox without having sand thrown in your eyes unexpectedly. As you can see from those doing it not being aware, the chance of the general public knowing is much less thus it's a common practice until someday when something happens, or you tick off the wrong person.

[<Steve> 82]

I really wish the policy of giving credit for the option money would change. I almost wish I joined the bar instead of adding broker to my investor hat. Some new hotshot attorney could make a great living off unexecuted lease options. Pure option money is non-refundable, it pays for the option only, but you can make it refundable by allowing it to become considered earnest, or down payment money.

I know what you mean Brian. It amazes me how just because one is a real estate agent or broker all of a sudden one is an attorney of law. I would never make option money refundable. I want a commitment from any potential tenant/buyer going in that they have something to lose. As far as a pure option, nope, it’s not option consideration, earnest or a down payment. I wouldn’t do it that way.

 

Yes, it is easier to tell a tenant buyer you will credit his option money to the purchase price but I suggest you give it back to him through rent credits which separates it from the option and don't refer to the option at all. But take the extra minute and say this is how we handle it for legal reasons in order for you to apply your option payment toward the purchase price when you buy.

I don’t like this either. I would rather be straight with folks. Too much like smoke and mirrors. Your approach is to confusing. I think it is more about keeping things simple as compared to easy.

 

And once again I wanted to upchuck at the suggestion to enter a consultation agreement, and the suggestion the fee be based on a percentage. You lost your position as a principle in the deal and like it or not your consulting is a licensed activity and it would be a slam dunk case if caught. Maybe even thrown into the practice law and the bar can get you as well as the real estate commissioner. I can hold up banks all day long and it's legal until I get caught, and if the statute of limitation expires I can even go into the police station and confess all day long. So play it safe and do it right and enjoy life in the sandbox without having sand thrown in your eyes unexpectedly. As you can see from those doing it not being aware, the chance of the general public knowing is much less thus it's a common practice until someday when something happens, or you tick off the wrong person.

Principle in a consultation agreement? You’re kidding right?