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ShaneMcKenna

Lease to buy option for my first home

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I went yesterday and looked at a house. They are asking $159,900. It’s a real nice house.

I’ve been in the house before, I used to know the person who rented from the lady a few years back. I’ve always liked the house and just recently she put it up for sale. She is asking 160. Whether we get it for that or lower isn’t my question. I’ve been looking for a house for a while, but I’ve been telling myself I’m not in the market for 6 months to a year. I was over at a friend of the families’ house last night and he said if I really want that house, he’ll buy it. I can rent it from him for a year with the option to buy. Can I get some more information on leasing with the option of buying for my first home? I am under the impression I pay all the mortgage, and utilities. Do I pay the property tax or does he? I’d assume I do, because I don’t know why he would want to be out the $200 a month. What about home repairs? He is doing me a favor; I just don’t want to see this get messy. He is going to take out a home equity loan, and get the house for me now. So I will be paying him $900 a month “rent” and if I decide to buy, which I am planning on doing it will go towards the down payment and principle right?

Say we get the house for $150,000, @ 6% that comes to $900 a month. I wanted to be around $700-$800 a month. Can I give him $15,000 to put down on the house now? That way we would only finance $135,000 and the mortgage would be $800 a month. Then when I buy a year from now the $15,000 I put down goes to him and I only finance $135 then? Sorry if this is really confusing you, it’s just real new to me and I want to get as much information as I can.

Thank you,

Shane McKenna

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Hi Shane,

 

Ok, let me try to help you out here:

 

1) Taxes: You pay him and he pays the county for it.

2) Utilities and mortgage: Yes, you will pay for both

3) Repairs: Usually you negotiate this. You might agree to cover the first $200 in damage/repairs/cleanup and he covers anything over that. It's just an example.

4) Downpayment: You need to decide on this one. If you put $15,000 down now, you may regret it later not to mention that you might be able to put it to better use now. You could put some down now and some later. It's a good idea to go in with a lower LTV after the first year. If your loan balance is $135,000 and the sales price was $160,000 then the LTV (loan to value) after a year would be 84%. I would try to get some big rent credits and bring the LTV down to 80% then you can get better rates and terms on the loan balance when you are ready to put your own financing in place.

 

Let me know if I can answer anything else if no one else does! :D

 

Andrew

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I appreciate the reply I am still a little confused on the idea. What is the difference with him buying the house now and renting it out to me, or me just going in by meself and buying the house now? I dont see how he is helping me other than the fact that if he doesnt buy the house, someone else will and it won't be avalable at the time when I am ready to buy. It isnt like the house is going for $20,000 off its suggested retail or something like that. I just dont think I can afford the mortgage now. 6 months from now I should be able to. If he was going to buy the house and rent it out to somebody else for 6 months to a year, I could understand. But what is the difference with him buying the house now and leasing it out to me, or me just buying it myself. Sorry for making something so simple confusing. I just would appreciate it if someone could break this down for me and try to help me understand it better. Thanks again, Shane

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One of the disadvantages I can think of is if I am renting I will not have the tax benefit of owning a home. So he will be able to write the interest off on taxes right?

I don’t understand how this will help me. Can someone point me in the right direction? Thanks, Shane

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Shane,

 

If you truly want the house then go with your friend's offer. Otherwise let the house go and find another one when you are ready to buy. Your friend is trying to help you while helping himself make money from you. If your credit is good enough to buy the home yourself why dont you buy it now while interest rates are down?

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Hi, Shane. Let me pipe in with my take on this.....

I’ve been looking for a house for a while, but I’ve been telling myself I’m not in the market for 6 months to a year.
Why do you think you're six months to a year away? What's holding you back right now?
I was over at a friend of the families’ house last night and he said if I really want that house, he’ll buy it. I can rent it from him for a year with the option to buy.
Personally, I'm not a big fan of mixing friendship and finances. I've seen too many relationships/friendships/families go south when a financial matter didn't go as planned. YMMV, of course, but have a Plan B if something goes awry if you do ultimately go this route.
Can I get some more information on leasing with the option of buying for my first home?
Sure. You're complicating this unncessarily so. Let's assume you go ahead and lease with option from your friend. The terms that need to be settled upon are: length of lease, monthly payment, and purchase price. Keep in mind from your standpoint that longer is better, and less is more. In other words, you want as long a lease as you can get from your friend, and the lowest monthly payment and purchase price he will accept.

You will make one rent payment to him each month. From that, he will make his mortgage payment. His monthly payment is usually PITI: Principal, Interest, Taxes, and Insurance. So, tecnhically he is making that payment, but in reality it's coming out of your pocket. Capisca?

As for home repairs, this is another term that is negotiated. Generally, with a lease purchase deal the tenant/buyer is responsible for all maintenance and repairs. It's to your advantage to keep your liability in this area to a minimum. You might suggest you will be responsible for the first, say, $200 per incident. This will free him up from much of the day to day aggravations of being a landlord, while protecting you from major expenses should something big occur.

Keep in mind that at this point you are simply a tenant, with an option to purchase. And until you exercise that option, the owner retains all the tax benefits of ownership. Which are substantial, by the way.

I see where you are talking about interest rates and related matters. It's irrelevant to structure this deal. Your concerns with interest rates and amount of down payment is putting the cart before the horse, Shane. Worry about that when you are ready to buy.

One last thing: you mentioned putting down $15K as option money. You'd be wise not to do that. That's risking a heck of a lot of money. You are aware that option consideration is nonrefundable? Why not put down $1,500 instead?

Hope this helped.....

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Thank you for the replies. The reason I say I can't afford it now is because I have a few more months of paying for school. That in a way is a mortgage payment to me. 6 months from now I should have school all paid for and I should be able to afford the mortgage, taxes, utilities and everything involved in owning a home. It's just right now, I can't do school and the mortgage. That is how I don't understand how this will work even if my friend buys it now. I'll still have to come up with $900 a month that if I stay at home for 6 months, that's $900 that stays in my pocket. (Times every month) It'd be one thing if the house was going for $120,000 or something like that. Or if he could rent it out to someone else for 6 months, then I'd understand. But for him buying it now and me renting it from him, I'd rather just buy it myself right now. He is seeing the tax breaks, and he is building equity. All im doing is building a little credit. But I have credit, and I have the money for the down payment. I am just waiting for school to be out of the equation. I have another few months where I have to put all my money towards school. Then I should be ready to get into a house. Does that make any more sense now why I am against the idea in a way?

Thanks again, Shane

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Does that make any more sense now why I am against the idea in a way?
Good sense, actually. You've made a convincing argument as to why you shouldn't do this deal, Shane. Don't be emotional, and don't be the motivated buyer. Let it pass for the time being. When the time is right, you'll know it and there will be other houses and other opportunities.

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thank you very much. I just was wondering if there was something major I was overlooking on the subject of Leasing with the option to buy. That is something I may get into in a few years. (with me being the homeowner and doing the leasing) But I dont see any advantages to me doing it now to get into my first house.

:D Shane

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But I dont see any advantages to me doing it now to get into my first house.
As you describe this deal and your situation, neither do I.

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Hey Shane,

 

Maybe you can make a lease option work for you under your own terms and not the homeowners. Why don't you see if you can make an arrangement with the homeowner directly for say $145k.

 

$145,000

-$4350 (3% down as option money)

-$10,800 ($900/mo w/ 100% rent credit)

_________________________________

and then you finance $129,850 in 12 months time

 

Try explaining to the homeowner how 6% will go directly to the realtor, which at there price will cost them $9,540 in fee's reducing them to $149,460, and all the months of payments they will be making while trying to sell the home.

 

So Mr. Homeowner, as you can see, in an ideal situation the best you can do is $149,460, and if you need to pay the mortgage for 3-6 months look at how quickly that can be reduced to 120k. If you are willing to work with me Mr. Homeowner, I can take over your payments immediately if not sooner, and with the backend equity I am building I am sure to people to get financing in place in 13-14 months, possibly even sooner.

 

Play with the numbers until you get them to your liking, I really do not see a reason for your friend to incur closing costs to get a home for you. If you are able to do this correctly you may be able to use the equity buildup to pay all you closing costs.

 

Michael Pine

:ph34r:

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The only thing I could think of doing if anything was buy the house myself now for $150,000, put $15,000 down and finance $135,000. But rent it out. (Without the option to buy) Because after 6 months or a year I'll be wanting to get into that home. But in the mean time someone else is paying me so I can own that home.

I don’t think it is that easy so I may pass on this offer. I just really want to get into real estate. I just need to learn a lot more and I need to feel confident about it.

 

If I had an $800 mortgage, I know I could rent the house out for $1000 and put all that money towards my mortgage. I'll be responsible for the upkeep of the house and the taxes. That is where I get a little scared. But say we can go a full year without anything going wrong with the place and all the renters’ money going towards my mortgage, I'd be getting 1 year of my mortgage paid for. (I know most of it will be interest) But then I'd be ready to get into the house on my own. That way I would be seeing the tax benefits, and I would be building equity. Does anyone else think that approach is better off than me doing the renting?

 

 

:( Shane

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How long has this house been on the market? Will they come down to say 140k? if so you 15k just brought it down to 125k. If you rent it out you have to consider you will have to get a Non Owner Occupied (NOO) loan.

 

Thrifty is my middle name how about this....You buy it get a room mate or two the rent is $1200 split by 2 = $600ea by 3 is = $400ea or $800 to you and your MTG is paid you don't have to stay at home and if you did an interest only payment for the first year or 2 you should be able to get your taxes utilities all paid for. I bet if you talk to Andrew or Mike in the funding forum you might be suprised they might be able to get your payment (interest only plus taxes and insurance) down around $700-800 instead of $916 PITI @ 6%

 

I think a couple of roomies would be worth it... :(

 

Just a thought

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I thought about getting the house and having a friend move in with my and pay rent. There is only room for 2 people, I couldnt get 2 buddies in there. Just 1 more. That would help, but still I would rather hold off on that. If anything I'd be interested in renting the house out. I am going to talk to my dad about it later tonight. Thanks for the ideas. Shane

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