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alterman

Trying for 1st Deal

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Background:

One of my property management owners had expressed interest in a LO in the past . He bought a home in 2104 for $120K and today it is assessed for $150K. Comps are selling for $150-$165K.

We had been renting the home for $1400. Since the lease is over I put a tester ad to see if anyone was interested in a LO for $1600 and over the weekend I got a call from a interested TB with

$55K income, 580 credit score plus $5K option fee.

She has a home that is too small and will need to rent her home when she finds a place so another opportunity possibility.

 

I have 2 managed homes with this out of state owner and I want to make sure I am treating him fairly as he is a client. His other home the current tenant has expressed definite interest in a LO for the home she is living in in the spring when her lease is up.

 

I know a sandwich I can make more but as this is my first deal , a client I am more comfortable taking the option fee and turning it over to the owner. I can possibly make something managing the property-making sure the rent is collected.

 

I am just trying to figure out how I price it -Is the price $165,000 to the TB in the paperwork and I take my fee from that.

So in 3 years she owes $160K. Or is the actual home price $165k and to get the $165K she gives me a option fee of $5K. We have not discussed rent credit at this point.

 

I was going to go up on the house price and rent price a % each year.

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I guess another way I could do this deal is to split the difference with the owner of $200 each month.This is from the $1400 traditional rent and the $1600 Lo rent. Or give the tenant $200 a month rent credit to get the deal. Don't want to be greedy but want to make my first deal and have to make it

desirable for all parties.

 

 

 

 

 

 

 

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There are a few ways to approach this, but I agree that with the details you described it is best approached as a Cooperative Assignment.

The easiest way to figure the numbers is to start with a true net selling price to the homeowner and build from there. Let me give you an example. . .

After checking recent sales data you determine that the seller can realistically expect $150K at closing, assuming the t/b exercises their option. But to this $150K net price, you need to add any rent credits that you are offering, along with whatever option money you are pocketing.

For the sake of clarity let's say the rent credits totaled $5K, and you the t/b was putting up $5K option money, all going to you. That $10K needs to be added to the option price that is written into the option agreement and that you would be advertising. So in this example, the advertised price is $160K.

Questions?

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How about the negotiating with the seller end . I am not sure what information to give him as he is going to ask how much can

I get for my house? I will tell him $150K and the tb will pay me? and do I not mention the rent credit?option fee the tb is paying me? I am guessing at the end paperwork he will see that and I don't want any surprises.

Ex. I am giving $200 a month rent credit.

Year one he will get $150K TB pays $5K+$2400rent credit= $157,400K

Year two if we add 5% to the house price

$157,500 + $5K + $4800= $167,300 K

Year 3 add 5% to the house price

$165,375K + $5K+ $ 7200K= $177,500K

 

Do you add a increase each year to the sales price and rent price? Is 5% too high or should I only add 3%?

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I don't often do 36 month deals. Most homeowners are not up for that. They want their house sold and they want their cash. 12 months is reasonable. But 36? Not so much.

Regardless, I set the price at the top or a little above the top of the current value. It is impossible to predict prices 2 or 3 years down the road. So many things can happen that can affect prices in either direction. I want the t/b to exercise their option and when they do, to be able to obtain financing. If the appraisal comes in well below the agreed to price the t/b is in a bad position. Everyone is aware, or should be aware, of the risks involved, such as prices rising or falling. But when a homeowner tries to make their argument that prices will rise 10% this year, next year, and again the following year, I'll ask if they can guarantee this in writing for the t/b. They won't, they can't, and the deal dies. So unless there is a particular reason why you are doing a 36 months deal, I suggest you stick to 12 months.

Homeowners always ask how much you can get them for their house. I do a market analysis and present them with the specific numbers: length of lease, monthly rent, and net selling price at closing. I don't mention rent credits because it is one more number for them to wrap their head around and that is often problematic. Besides, their focus needs to be on that net figure. The rent credits and my/your share of the option money is added to the net price, not deducted from it.

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I can see how the owner would like the 1 year. My concern with TB is will they be able to repair credit issues in 1 year.

What type of credit score do you accept so that it would be realistic for them to get approved for a loan in l year?

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A credit score, in and of itself, shouldn't be the sole factor in determining an applicant's credit worthiness. Many other factors will be considered by a lender.

That said, you can require an applicant to sit down with a mortgage broker to have their situation reviewed so all parties can know the likelihood of the option being exercised and the deal closing.

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I look for a tenant/buyer that for whatever the reason they can't buy today, it can be taken care of in about a year or so. If they need to extend the lease into a second year, the rent credits stop; however, the credits they have received are not lost and carry over to any extended term.

 

And as MC said, I always recommend the tenant/buyer contact a mortgage lender before or at the start of the lease. The lender can review the t/b's situation and let them know what they need to do during the lease term to be able to qualify and obtain financing to purchase. So when the t/b is ready to purchase there are no surprises and a lender is in place.

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I was going to connect tb with someone that can tell them what they need to do for credit issues. I just wanted a ball park score so that I would not go through the app process if there is no way they will come close to qualifying in a year . For ex. if they had a 580 credit now is there hope it can be brought up enough in a year or can it be lower or needs to be higher.... If they had a short sell they would not qualify in a year either.

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That is how I look at it. And the better t/bs are those who know their situation and are already working to get into position to buy. Kind-of on the back side of getting their credit in order, if credit is the issue.

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I was going to connect tb with someone that can tell them what they need to do for credit issues. I just wanted a ball park score so that I would not go through the app process if there is no way they will come close to qualifying in a year . For ex. if they had a 580 credit now is there hope it can be brought up enough in a year or can it be lower or needs to be higher.... If they had a short sell they would not qualify in a year either.

I think a mortgage broker can better answer your questions. And I don't think the FICO in and of itself is the only factor, which is why it is hard to say with certainty that a score of, say, 580 will definitely get financing or be the reason for being turned down.

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I will connect with a mortgage broker locally for that information- just didn't want to put someone in a home with no way of qualifying in a year.

In addition to the option fee do you collect a security deposit ?

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Shelly, I agree. We're not in the business of knowingly placing a t/b in a property who doesn't have a chance of getting financed. So a knowledgeable and helpful mortgage broker is an important piece of the puzzle.

I do not typically collect a security deposit in addition to the option money. It can become an obstacle for many prospective tenant/buyers to come up with first month's rent, option money, security deposit, and some homeowners even insist on last month's rent, too. Each deal is different, of course, but I typically go with first month's rent and option money.

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