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Shar NJ

Applying option consideration to down payment

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Hello All! Just rereading some of the forums. This place is great and where I learned to do L/O's 5 years ago.

 

I have been getting option consideration of $5-8k through these years, sometimes splitting it with the seller. I'd like to take bigger considerations of $8-12k and while I've never had it applied to the down payment, I think some of you are structuring it that way.

 

How is your mortgage broker structuring it? How is it showing on the settlement sheet?

 

Thank you!

 

Sharyn

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Hi, Shar. What do you mean the option money has never been applied to the down payment? Where does it go then? I'm assuming a credit towards the purchase price, no?

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Hi, Shar. What do you mean the option money has never been applied to the down payment? Where does it go then? I'm assuming a credit towards the purchase price, no?

Yep! Seller wants 200k, I sell for 205k and either keep the 5k or split with the seller if necessary. I'd like to set it up where a portion of the consideration goes towards the 3.5% required for FHA.

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OK. A cooperative assignment. Typically, at least the way I have always done these deals, is that the option consideration/assignment fee is credited in full towards the purchase price. So in your example above, if the homeowner is to net $200K, then whatever portion of that option consideration I keep needs to be added on top of that $200K. $5K option money, all mine? Then the purchase price is $205K, (plus any rent credits).

At that point I am out of the deal and the t/b and homeowner are dealing direct with each other. I have no further financial or legal interest in the deal. How the purchase and financing proceed from there is between the t/b and their chosen lender. Usually, option money will be considered a part of the down payment, while rent credits are a credit towards the purchase price. One is a hard cash transaction, while the other is a paper transaction with no exchange of cash. That how most lenders see it. Ideally, the t/b begins the process early enough so they can shop for a lender who meets their needs and can get the financing they want.

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Lenders like to see above market rent and a contract that states that X dollars of the monthly rent is option money to be credited toward the purchase price if the option is exercised. It makes the regulators Happy and avoids them claiming it was rent paid the seller and not funds belonging to the tenant buyer.

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