Owner refi with CA in place

[ErikOk 10]

I have a possible deal in the works, and the seller has brought up doing a refinance on their existing mortgage because their monthly payments are high. Payments are $1400/month and that is probably about the max that you could get for rent. The way they are figuring it is that if they can refi it should allow their payments to drop and still get the $1400 or so rent.

 

Have any of you ever had this scenario where the seller is wanting to refi? By the way, the property is vacant now.

 

My main question/concern is should the refi be completed before the CA?

 

Or, would it be OK to have a tenant buyer in there before or during the owner's refi? By this I mean that it might look better to a lender to have the house leased and getting a cash flow.

 

Could there be problems with the new lender wanting to see the CA documents (especially the Option to Purchase)?

 

Will the lender usually even ask the seller if the house is being rented out and/or ask to see any documents (the CA documents)?

[<Steve> 82]

Back when doing Refis where more popular I would tell sellers that if they wanted to pull cash out from their equity or lower their payment they could refi away as they still owned the house. The only word of caution was if they refied at an amount higher than the purchase price they would need to come to closing with the difference.

 

Having a tenant/buyer in place producing an income can be a possitive. Just show the refi lender the Lease Agreement.

[ErikOk 10]

Back when doing Refis where more popular I would tell sellers that if they wanted to pull cash out from their equity or lower their payment they could refi away as they still owned the house. The only word of caution was if they refied at an amount higher than the purchase price they would need to come to closing with the difference.

 

Having a tenant/buyer in place producing an income can be a possitive. Just show the refi lender the Lease Agreement.

Hey Steve,

 

Sellers are basically at a point where they really don't have any equity to speak of. Their main point on doing the refi is to lower their monthly payment. But thanks for making your point on pulling equity out & doing a refi larger than the purchase price on the option to purchase.

 

I have MC's contracts, so on the CA Residential Lease it makes no mention of the Option to Purchase, so that makes sense to have them submit only the lease. I guess I should mention that to the Seller to not show the Option to Purchase to the lender (or maybe just tell them to show the lease agreement only, maybe those would be better words to use )

 

I just don't want to have a tenant/buyer in the house & have a lender go "weird" and find that there is an option to purchase when the Seller goes to refi.

 

BTW, the Seller has come up with terms of 24 month lease, $1100/month rent (even though right now they are paying a mortgage of $1400; I think rent could probably go for the $1400 though; and price they are asking is $167,500 (I figure around $175,000 is a good option price for this, and am even considering a bit more with such a long term lease).

 

Thanks

Erik

[<Steve> 82]

I think only showing the lease for a refi is fine. I don't see why including the option agreement has any bearing good or bad, except to maybe confuse some rookie lender.

 

Looks like the spread in the rent amount is about 30% and the longer term lease would be nice for a SLO. If the sellers's price was lower it could work. What's the lowest price they need vs. asking? Think they could go 3 years? That is if you want to do a SLO.

[ErikOk 10]

I think only showing the lease for a refi is fine. I don't see why including the option agreement has any bearing good or bad, except to maybe confuse some rookie lender.

 

Looks like the spread in the rent amount is about 30% and the longer term lease would be nice for a SLO. If the sellers's price was lower it could work. What's the lowest price they need vs. asking? Think they could go 3 years? That is if you want to do a SLO.

 

Steve,

 

I don't think 3 years is do-able, but I haven't really approached them on that, I just had them tell me what time frame works for them.

 

Regarding SLO, their payoff amount on the mortgage is around $163,500, so I don't think they have much room to move down on their price (considering closing costs, etc.), so it sounds like a SLO probably isn't do-able on this. Your thoughts?

[<Steve> 82]

Well they don't pay closing cost the tenant/buyer does. Their mortgage balance will be paid down more over the three years so the seller will receive some cash at close. And you mentioned that the purchase price can be pushed up a bit higher.

 

When I look at a potential SLO, and this is just my comfort zone, I like a 20% spread on the rent. And I like to offer a 50% monthly rent credit. So, I will calculate the numbers with a 100% rent credit which will leave some on the back end of the deal when I only offer the 50% to the tenant/buyer. It depends on the property but that is my minimum in today's market.

 

It's hard but if you can push back on the seller to get them to thier lowest price, and the Advantages to the seller are even greater with a SLO, there maybe more room. You never know until you ask. And if the seller squaks fall back to a CA. This deal as is seems to be a great CA.

[ErikOk 10]

Well they don't pay closing cost the tenant/buyer does. Their mortgage balance will be paid down more over the three years so the seller will receive some cash at close. And you mentioned that the purchase price can be pushed up a bit higher.

 

When I look at a potential SLO, and this is just my comfort zone, I like a 20% spread on the rent. And I like to offer a 50% monthly rent credit. So, I will calculate the numbers with a 100% rent credit which will leave some on the back end of the deal when I only offer the 50% to the tenant/buyer. It depends on the property but that is my minimum in today's market.

 

It's hard but if you can push back on the seller to get them to thier lowest price, and the Advantages to the seller are even greater with a SLO, there maybe more room. You never know until you ask. And if the seller squaks fall back to a CA. This deal as is seems to be a great CA.

 

Thanks for the detailed replies Steve. What figures do you think would make this a sweet SLO. I'm thinking that even if they aren't willing to lower their current price of $167,500, maybe if they go with a 3 year + lease, that the price might be able to be bumped up past $175,000. That way they could even get a bit more than the $167,500 and I could possibly get a bit more on my sale price to the T/B. I would like to see your thoughts on this.

 

Yes I do agree thought that it seems like a pretty nice CA.

 

When you said "and the Advantages to the seller are even greater with a SLO", do you mainly mean their loan paying down plus possible higher sale price for them (considering appreciation over a 3 year period)

 

Erik

[<Steve> 82]

MC would tell you that this deal is to skinny for a SLO, and it is, at least on the purchase price. If it is a nice house in a good area and the property would bring interest from potential t/bs, I would want a $20K to $25K minimum spread between the seller's price and the price offered to the tenant/buyer in this deal. So maybe the seller receives $165K and the tenant/buyer price would need to be in the mid to upper 180s. Not sure if you can get the price this high or not.

[ErikOk 10]

MC would tell you that this deal is to skinny for a SLO, and it is, at least on the purchase price. If it is a nice house in a good area and the property would bring interest from potential t/bs, I would want a $20K to $25K minimum spread between the seller's price and the price offered to the tenant/buyer in this deal. So maybe the seller receives $165K and the tenant/buyer price would need to be in the mid to upper 180s. Not sure if you can get the price this high or not.

 

Maybe in 3 years it might appreciate to mid $180's, but not likely any sooner. As you know, it's hard to project price out to any length of time really. So if I am calculating correctly the % spread would be around 12% assuming $20k / $165k, is that right? So you usually have a fixed dollar amount spread, or sometimes do you shoot for a certain percentage?

 

I'm thinking CA on this as well.

[<Steve> 82]

The Advantages are greater with a SLO. I mean all the seller has to do is take the monthly check to the bank and the property goes on "Auto Pilot"

 

I don't have a specific % for a price spread. For a really good SLO I will calculate the numbers with a 100% monthly rent credit, a large option conisderation (what ever the market will bare) and still have a back end profit. I don't project what the price will be in the future. Who knows? I need to set the price in todays market.

 

Looks like a CA is the way to go.

[ErikOk 10]

Who knows? I need to set the price in todays market.

 

 

Yes, because there is not way to know if the t/b will exercise the option in 6 month, 3 years, or at all for that matter and what that price will be.

[ErikOk 10]

This is a property 1 block from the subject property:

 

http://www.realtor.com/realestateandhomes-detail/2003-5th-Ave-Nw_Ardmore_OK_73401_M85317-12109?source=web

 

Subject property is:

Year built 1995

Sq Ft: 1853

Bed: 3, Bath 2

 

I came up with $175,000 considering the subject property is 11 years older, but square footage is higher. Thoughts on the price I came up with? Maybe could do more than $175k and also make seller happy by offering them a higher price than $167,500? Just some thoughts on my part.

[Doug Pretorius (ON) 9]

Erik, you might be able to get the spread you need on a SLO if you get the seller to bump it to 3 years and agree to sell the house to you "for the mortgage balance at closing". That way you benefit as you pay the mortgage down. That's what I did with my one and only SLO and it worked out great, the seller was just happy to get the house off his back.

[ErikOk 10]

Erik, you might be able to get the spread you need on a SLO if you get the seller to bump it to 3 years and agree to sell the house to you "for the mortgage balance at closing". That way you benefit as you pay the mortgage down. That's what I did with my one and only SLO and it worked out great, the seller was just happy to get the house off his back.

 

Hi Doug,

 

I have heard about the sell "for the mortgage balance at closing". With the SLO, do you use an Early Termination agreement like in MC's contracts so that you don't get stuck making payments on an empty house?

 

I did point out to the seller about the payments they are receiving are paying down their existing mortgage, and that money doesn't have to come out of their pocket. So in the end when the house closes it will be equity (profit) for the seller.

[ErikOk 10]

UPDATE:

 

This is what I got from a mortgage broker I know:

 

My questions were:

 

If the owner has a lease purchase instead of a straight lease contract in place with a tenant, would there be any impact on getting refi? Would the house being occupied be an advantage (cashflow), disadvantage, or not even factor into the refi. Would any potential lender need to see the lease or lease purchase contract?

 

His response:

 

1)You cannot refinance anything with a lease purchase agreement because you've already entered into a contract to sell so to speak.

2)The rental income could possibly be used if the owner has been reporting the income on their tax returns.

3)Depends on the lender, but if they are good and know what they are doing they would request a copy of the lease to make sure there were no purchase provisions with the existing tenant.

 

******

So, what thought do you all have about this? I don't want to get a CA tenant/buyer in there and then have the sellers try to refi (lower their interest rate) and then not be able to because of an existing lease purchase.

 

Should they refi before I sign an agreement with them and get the refi totally finished? I hate to wait a long time for the refi before proceeding with doing the deal, on the chance I might lose the deal. I am just trying to figure out what to tell the seller.