I have a guy who approached me about buying my home with a lease option. We haven’t talked numbers yet but I want to be prepared going into it. I have never done this so I appreciate any advice.
Here are the facts. I bought the home for $71K at sheriff sale. I am asking $162,500 right now. It appraises for just above that $164K high end. The home has been on the market for almost 4 weeks. For the improvements and the purchase I have roughly $130,000 in loans against the home that I will need to pay off with the sale.
One more thing to consider, I need roughly $17,000 after the sale for other expenses I need to pay.
With these facts in mind, how should I structure this? From what I understand, I need to refinance a loan for about $130K to at least pay off the other loans I have. I will then figure out what payments should be on a $160,000 loan and he will pay me that amount so the difference is my premium which I pocket every month (or should I just decide what his payment will be regardless of the purchase price??). I will then also collect about 5% down (should I do more or less??) which will go in my pocket but will also go towards his purchase should he buy it at the end of the lease. 5% would give me $8000 so I need to get $9000 more out of the equity. Do I do the loan for $139K or do an additional home equity for $9K? If I can get the loan under $130K, I can avoid PMI too. I then make a 2 year lease increasing the purchase price by roughly 4% a year correct? By the way, I am in Iowa if that matters.
Well that’s a lot of info. Hope it helps and I appreciate your advice. If it means anything, it is going to a good cause. We are adopting and the $17K is going to fund it so we need to be wise about this.
Here’s some advice.
First, you’re putting the cart before the horse. Since you haven’t even talked numbers with this possible T/B, you have no idea what they have in mind. I’m assuming that they do know that the purchase price is $162,500. However, since you haven’t discussed downpayment (option fee) and monthly payments, they could be thinking $500 down and $500/month. Sounds crazy, but I’ve had people call me on $200K homes with that in mind. Do you have any info on this possible T/B at all? Could this be an investor that is trying to do a lease with a sublease and you just don’t know it yet?
Second, if you have never done a lease/option deal, then I strongly suggest that you get with a good local, preferrably referred, attorney that knows about them for your state and get them to do the contracts for you. It will prevent a ton of possible headaches down the road.
Third, as far as refinancing goes, here’s the numbers. If the lender accepts the $164 appraisal, and has a limited seasoning refinance, and you’re credit is good enough, you should be able to get 80% of that or about $131K. While it may be possible to get more, it’s unlikely as it’s a non-owner occuppied property and banks generally don’t do loans higher than that NOR is it recommended because it puts you at a disadvantage should you have to resell at a later date (not to mention, most markets are soft right now, so appreciation is not a given).
Fourth, how long is your average days on the market in your area? Do you have this up with a REALTOR? 4 weeks is not that long. IF you need to sell, I’d suggest waiting.
Fifth, why does this possible T/B want to do a lease/option as opposed to buying? Have them go to a good local, preferrably referred, mortgage broker and see if they can qualify for a mortgage. A good mortgage broker should be able to get someone with fairly low scores financing, if all it is is credit issues.
My 2 cents…
Like Raj stated, unless you know what interest your buyer has in your property, it’s difficult to make a sound decision. Is he an investor or a wanna-be homeowner with checkered credit who can’t quite qualify for a conventional loan right now?
I’m going to assume its the latter, lease him the house for $174,900-ish since you’re providing terms and give him 18 months to qualify for a loan. Give him some rent credits, make him pay a 5% non-refundable option consideration and make sure you run a background/credit check on him prior to finalizing the deal to CYA in case he’s some looney tune freakshow.
B4 you do anything tho find out what his interest is in your property and as Raj said, get an atty to draw you up a contract if this guy is serious about lease optioning your house as a future homeowner. And remember, you don’t want a tenant or renter, you want to bonafide party seriously interested in buying your home in the next 6-18 months. Huge difference.
I’m pretty sure he would be living there since he was asking questions about the neighborhood for his kids and how busy the street is, etc.
He is moving in town from another city. It seems like he has a job that requires him to be on the road a lot. I’m not sure why he is wanting the lease option isntead of buying unless he doesn’t know how long they will be in this town. It could be that his job moves him around every 1 or 2 years.
You need to find out though what his plans are. You make a good point, and maybe you’re spot on but still ask and due your due-diligence before you commit and then find out afterwards your assumptions weren’t even close.
Like they always pounded in our heads when I was in the USAF…CYA! Cover Your you-know-what!
Even though Roger J already mentioned, I think it is worth repeating… it is NOT a down payment, it IS an option fee. Depending on state laws, you call it a down payment and he has equitable interest in the property - you don’t want that.