How does the option fee get accounted for at closing?

On a sandwich L/O if the buyer pays me (the investor) the option fee will I have to present that money at closing? Or does his cancelled check suffice, even though I’m not the owner?

I know, I know sandwich L/Os aren’t the preferred method in the first place for this very reason among many others, but I’ve already done it now. :doh

The option fee will be used towards the downpayment by most Mortgage Lenders, some may even consider the rent credits. cancelled checks are always nice but the Option fee amount should be on your forms as well.Herbster


I got that part ok. What I’m concerned with is the fact that I’m not the owner of record. When the lender sees the option check made out to my LLC they’ll compare that to the title work and see that I’m not the owner. So will they make a big deal out of that and make me produce that option fee money at closing?

If your tenant buyer is ready to exercise his option, then you should exercise your option with the seller beforehand. Buy the property from the seller, so that the titled owner will be the same name as the seller on your contract with your tenant buyer.

If you don’t exercise your option well ahead of time, the tenant-buyer’s lender will see that the seller on your contract is not the titled owner and will refuse to make a loan to your tenant buyer. Additionally, the lender will see that you have not been on title at least 90 days. The buyer may also fail to get financing approval because you don’t meet his lender’s title seasoning requirements.

You won’t have to deal with producing the option consideration at the settlement table because you probably won’t even get that far.

Thanks Dave. That makes a ton of sense.

Seller has been thinking about just deeding it to me anyway because she’s getting tired of petty HOA issues. Only reason I haven’t done it yet is because my cashflow is weak right now and I know closing cost will be at least a couple thousand that I just can’t spare right now. When I get another deal done I will just go ahead and get the deed NOW well before the tenant even thinks about exercising his option.

By “just deeding”, do you mean the seller is considering letting you take the deed Subject To the existing mortgage – in effect, rescinding your lease option agreement?

If this is the case, won’t this be a better deal for you? Closing costs should be minimal for deed preparation and recording in addition to any title transfer fees that may be charged plus the cost of title insurance.

Dave - correct. The seller is strongly considering just deeding it to me sub2. In which case yes it would effectively rescind the lease option agreement between the seller and I, and I figure I’d just leave the tenant’s lease option agreement in place as is since the seller isn’t listed on that agreement (my LLC is). Yep, it’ll be a much better deal for me. I’m gonna contact the closing attorney and make it happen asap.