Option Consideration

[mostpop 0]

how come you guys are only taking $5 as an option consideration when you guys are doing lease options? I

have buyers who have 25k or even 40k to put down on a lease option... that shoudl be applied towards purchase price...also what is the risk involved in taking a lot more moeny from the tenant buyer?

[MichaelC 160]

mostpop, welcome to The Naked Investor!

I think you are confused about the option consideration. I don't think any one here is accepting $5 as option consideration. That's what we want to pay the seller to secure the deal and make it legally binding. Then we aim for around 3% of the purchase price as option money from the t/b.

[mostpop 0]

1. if you secure the deal... when do you make the first payment? when the tenant buyer comes in? what if it takes you 4 months to find the tenant buyer do you keep paying the monthly fee until than?

 

2. is there a limit on how much money i can take from the t/b ... 3% is too low for me... i have t/b willing to pay $40k any risk on that?

[MichaelC 160]

1. if you secure the deal... when do you make the first payment? when the tenant buyer comes in? what if it takes you 4 months to find the tenant buyer do you keep paying the monthly fee until than?

You're talking about a sandwich lease? If so, you need to give yourself enough time to locate a t/b so you aren't making payments on a vacant property. You also need a weasel clause that allows you to cancel the deal if you can't find a t/b. Or you can write up the deal contingent upon your finding a t/b.

 

 

2. is there a limit on how much money i can take from the t/b ... 3% is too low for me... i have t/b willing to pay $40k any risk on that?

Legally, that's a good question. But I dare say that regardless of what your agreements might say, if you take $40K from a t/b who then decides he can't or won't buy the property, you are going to be in a legal tussle for that cash. Few folks will walk from $40K without a fight.

[mostpop 0]

you have been very helpful...some more questions

 

1. i thought i had nothing to worry about in due on sale clause for lease option becuase title doesnt transfer until they execute the option to buy but some people are saying that as long as you have a lease option they can trigger the due on sales clause.. is this true?

 

2. what is the normal process when doing lease option... do you write an agreement that says contingent upon you finding a t/b so you dont pay the monthly fees if you cant find someone yet? that seems to be the best way..

 

3. My main concern is if the property wont appraise and the owner cant drop the price.. they lose the 25k option payment... if it doesnt appraise in 3 years... it's not really my fault if i do the sandwich lease right? because they agreed to the price...

 

4. lets say i get a house under contract from seller 200k house, 1500 monthly... $0 option consideration. and i sell it to t/b $225k , $1500 monthly, $25k option consideration... when he goes to the bank to get a loan in 3 years.. is the 25k considered down payment? so he doesnt have to put anymore money down..?

[MichaelC 160]

1. i thought i had nothing to worry about in due on sale clause for lease option becuase title doesnt transfer until they execute the option to buy but some people are saying that as long as you have a lease option they can trigger the due on sales clause.. is this true?

Yes, some mortgages don't allow the homeowner to lease their property, and that would include a lease with option to purchase. That said, in almost 20 years of doing these I have never seen a loan called because of this. Doesn't mean it can't happen, but I sure wouldn't lose sleep over this.

 

2. what is the normal process when doing lease option... do you write an agreement that says contingent upon you finding a t/b so you dont pay the monthly fees if you cant find someone yet? that seems to be the best way..

That's one way and probably the least risky. But you can also do as I wrote above and have a cancellation clause in the agreement. Different ways to get to the same end.

 

3. My main concern is if the property wont appraise and the owner cant drop the price.. they lose the 25k option payment... if it doesnt appraise in 3 years... it's not really my fault if i do the sandwich lease right? because they agreed to the price...

Legally, you are correct. I have a financial disclaimer in my Option to Purchase Agreement that says the availability of financing is not guaranteed, nor is it a cause for a refund of any monies paid. But again, if you are receiving option consideration of $25K or $40K, you can expect some blowback if the t/b can't close the deal. That's reality. So be smart and be careful when setting prices.

 

 

4. lets say i get a house under contract from seller 200k house, 1500 monthly... $0 option consideration. and i sell it to t/b $225k , $1500 monthly, $25k option consideration... when he goes to the bank to get a loan in 3 years.. is the 25k considered down payment? so he doesnt have to put anymore money down..?

Option money can be considered part of the t/b's down payment because it is a hard cash transaction and there is a paper trail to support. However, it is not guaranteed to be and it could just as easily be a credit towards the purchase price instead. That's a decision by the lender. So don't go and guarantee things you can't provide.

[mostpop 0]

1. do you include a CYA (cover your ass) letter in lease option.. about due on sale clause may be called due? If you mention that they may call the loan due many people will not want to do lease option.. how do you explain this to them?

 

2. Right now i am contacting land lord who are renting their house asking them if they want to do a rent to own.. most say they only want to rent. and the ones that want to do a Rent to own wants really high prices which I dont think will appraise in 3 years.. have you had any luck getting lease to own from FOR RENT ads? if so any examples?

 

3. If the house is currently appraised at 200k ... would you try to sell it to your tenant buyer for higher than 200k like 225k? In this market if it doesnt appraise it would be tough for the t/b this is a big concern for me.. do you normally go higher than current comps?

 

4. i'm just starting out... approximately how many lease option do you do a year..?

[MichaelC 160]

1. do you include a CYA (cover your ass) letter in lease option.. about due on sale clause may be called due? If you mention that they may call the loan due many people will not want to do lease option.. how do you explain this to them?

Never. Why would I if it has never been a factor in any deal I've done?

 

2. Right now i am contacting land lord who are renting their house asking them if they want to do a rent to own.. most say they only want to rent. and the ones that want to do a Rent to own wants really high prices which I dont think will appraise in 3 years.. have you had any luck getting lease to own from FOR RENT ads? if so any examples?

Yes. All you need is to find what I call a "reluctant" landlord, someone who is renting only because they haven't been able to sell. He'll jump at your idea.

 

3. If the house is currently appraised at 200k ... would you try to sell it to your tenant buyer for higher than 200k like 225k? In this market if it doesnt appraise it would be tough for the t/b this is a big concern for me.. do you normally go higher than current comps?

It depends upon your market. If you're in a seller's market where houses are selling swiftly and appreciation is strong, you might be able to get away with it. On the other hand, if your market is the opposite of that, would any t/b agree to that price? Probably not.

 

4. i'm just starting out... approximately how many lease option do you do a year..?

Not enough to support my wife's shoe habit.

[mostpop 0]

1. i have a landlord that wants to do lease option, but he wants to put the purchase price "price base on appraisal in 3 years when they option to buy the house" ... now im trying to understand how that works... do we do an appraisal in 3 years and see what the price is than? now ... if we do the appraisal what if the bank appraisal comes in lower than our appraisal so who would do the appraisal us or the bank... if the bank does it what do we set as the purchase price?

 

3. if we set it to appraise in 3 years... how can I make money from this deal.... Can i make the option consideration not go to the purchase price or the down payment.. it would just be my fee... and not applied to purchase or down... is that legal?

[MichaelC 160]

That's referred to as an illusory contract. Meaning it isn't valid and a judge would rule it unenforceable. A price must be set upfront. If the homeowner is so sure prices are on the upswing he shouldn't be doing a 3 year option.

[mostpop 0]

I'm trying to learn comps could someone help me. http://tinyurl.com/6vuxksr that house zestimate says its $646...

 

I look at a few houses with similair sq ft and bedroom sold recently

 

G: $540k

D: $615k

F: $431k

X: $620k

 

they seem to be all over the place ...

 

1) what is the comps for this house?

2) how do i figure it out..i want to do a lease option for 1 or 2 years and I want to make sure the house will appraise when i sell it

[mostpop 0]

2. What happens if you get the house from the seller for $275 and the tenant buyer pays you $25k which makes it $300k and in 3 years the house appraises for $275k ... and the seller doesnt want to drop below $275k.... he says I sold it to you for $275k thats what it appraised for so i cant drop it and you already spent the $25k what can you do at that point? Also can you make the $25k not go to purchase price?

[MichaelC 160]

i want to do a lease option for 1 or 2 years and I want to make sure the house will appraise when i sell it

Unfortunately, that's impossible. No one knows the direction of the market and what a property will be worth two years from now. You price it at today's FMV and let the chips fall where they may. That's the risk with an option.

[mostpop 0]

Unfortunately, that's impossible. No one knows the direction of the market and what a property will be worth two years from now. You price it at today's FMV and let the chips fall where they may. That's the risk with an option.

 

I know thats all you can do but what can you do if it doesnt appraise and the seller wont drop the price and the t/b doesnt ahve money to bring ot the table? What can you do?

[MichaelC 160]

If the house doesn't appraise, the seller won't budge, and the buyer is unable to get financing, the deal is dead and the buyer loses his option money. . .unless there is something in the agreements that state otherwise.