In an owner-finance/sub2/lease option deal, even if the buyer pays me consistently, I don’t want to have to continue this relationship for the rest of the mortgage (30 years). When and how does the buyer refinance the house? Will he be required to put a down payment on a refinance? How does this part of the deal work? I hope I am making sense.
Please let me know! :biggrin
Thanks in advance!!
Matthew10
Hi,
You make lots of sense. First owner financing is escrowed and recorded as a sale, so under this type of agreement you simple word the note and deed of trust agreement as a 30 year note due and payable in 5 years or what ever term you want to make the loan!
Now taking the property over subject to existing financing can actually be escrowed and recorded as a sale, in some states they also refer to this type of transaction as a wrap! Just like the transaction above you can make it a 30 year note due and payable in 3 years.
The two transactions above can be refinanced because your buyer is on title and has a history of making payments on time and as agreed. The buyer would only have to bring more money to the table if there is not sufficient equity to refinance and pay off the underlying note?
A lease option is not a sale and is not recorded so you have to take your cost’s - 1ST TD, 2ND TD, Property Taxes, Insurance and any incidental cost’s like HOA, ongoing lawn care, pool service, etc.
Add these cost’s and expenses together, say for example this number is $1,000 dollars, now you add a option fee to you usual rental rate, say $250 dollars.
Now when you do a Lease Option you will ask for and recieve option consideration money, say for example $5,000 dollars, now when you do your cost’s and expenses (Fair Market Rent) $1,000 and ad your option fee $250 dollars, now if your option is for 3 years you can ad your option consideration dollars $5,000 along with 36 months of your option fee $250 x 36 = $9,000 dollars and credit the buyer $14,000 towards there down payment to buy the property!
In the lease option above they have to exercise and close a purchase prior to there option expiring.
The option can be any reasonable period of time .
GR
When the buyer is required to refi the existing note is dependent upon what both parties agreed to. For example, if you set up a one year lease option, then the refi would need to be done within that year.
You’re talking about at least two different animals here.
“Subject To” is a terrible method to use when selling your own property to a “one off” buyer. You want to use a Land Contract, or Lease with an option to sell. Either way, the buyer gets the title only when he pays you off.
Otherwise, offering a buyer the title before he pays you off, or gets a new loan in his name means that YOU are risking your credit with someone who can’t get a loan to buy your house in his own name without your help. Is that a good risk?
Meantime, let’s take a look at the benefits of using a Land Contract over a Lease / Option when “selling.”
Using a Land Contract (aka Agreement for Deed, Contract for Deed) is a great tool for selling. As far as the length of financing, you simply set a deadline for the buyer to pay you off, or otherwise refinance you out of the deal.
You may want to offer an extension of time to refinance for a few thousand dollars of extra consideration for whatever you can negotiate. We usually want something around $5,000.
Also, you need to realize that in some states a judicial foreclosure is mandated by law in the event of a buyer’s default using a Land Contract. So you can’t just extinguish the agreement upon a buyer’s default, or failure to pay, even though no title has transferred. That’s why we create a note that makes the buyer personally responsible for the entire note balance, that is NOT connected to the real estate, which can only be satisfied by paying us off, or by filing bankruptcy after we threaten to sue his butt off. It works to avoid having to foreclose judicially.
Anyway, don’t sell using “sub2.” That’s for buying (as an investor).
Just for giggles, the advantages, briefly, for using Lease / Options…
That’s it for me.
Good luck.
javipa,
What do you mean when you say that annual renewals are a profit center for the seller? Are there usually fees involved if the lease-option renews? I heard of lease-options that are a few years, but on 1 year renewable leases, is this what you’re referring to? If so what kind of fees do you usually charge a buyer who renews a lease?
Investrix,
Yes, lease/option renewal fees are what I’m referring to. Frankly, I’m not an expert on Lease / Options even though I’ve got wall of L/O guru materials. That said, the Lease / Option guru I trust the most (Todd Toback) here in Southern California suggests a minimum of a $5,000 option renewal fee. This happens to be the minimum rule of thumb I follow, too, if I want to extend a Land Contract.
However, that’s just a rule of thumb. If there’s very slight equity in the deal, and i can make more in payments than I can with a payoff, I’ll set the renewal fee at something that almost begs to be renewed. However, if I’ve got a wad of cash coming to me, I want a big renewal fee, in return for having to wait even longer for my money.
There needs to be a balance struck on the renewal fee. We can’t set it at something so steep that it creates a dysfunctional, or advantage-taking situation. Either we want to get paid off, or we don’t. If we don’t, then we make the fee small. If we do, then we set the amount higher.
So you might ask, how much should it be by percentage…? If the sale price was say $250,000, then perhaps something around 3 to 5 percent of the sale/option price will “encourage” the buyer to stick with the payoff program and not bail on us; forcing us to start over from scratch with a new buyer/end/user, etc.
However, even a failure to close would in most circumstances allow us to resell or re-option the house for additional down payments or option consideration. However, again, that doesn’t get us to the big payoff as fast.
Jay
Does that help?