First off, thank you for your patience - as I’m new to the world of RE Option investing.
My question is for the experienced guys - I’d like to hear conceptually how the option purchase works in the following scenario -
Please keep in mind - I’m looking for general knowlege here.
If the Seller purchased home for 400K 3 years back, currently has little to no equity in the home, due to the market value of the property decreasing in today’s market and their interest only mortgage. The seller has a family and is not planning to rent, but rather downsize into another SFH, but financially needs to get out from under the payment. If they sell the home to me with option to purchase, wouldn’t it be likely that the seller would need money for a down payment on their next home?
How can I make the seller comfortable with this type of deal when they will not be seeing their money for a few years.
Again, looking for “rubber meets the road” knowledge here.
thanks - I hope that my question was clear. Look forward to any answers.
If I understand the scenario you described correctly, this homeowner has no equity. Thus, there are no proceeds from the sale that can be used to roll into the purchase of their next home. So, then the issue for this homeowner is getting that monthly payment off their backs. And that’s where you come in. You come along and offer to take over their payments, (assuming you can cover it with the rent you will receive), and lock in the purchase price for a period of time, (the longer the better).
That’s a condensed version, but hopefully it helps.
thank you both for your replies. Aseruti, I’m looking at purchasing a property in the future(say 4 years) for an agreed to price. During that time, I’d like to advertise RTO, and get a future buyer into a 1-2 year lease with the option to purchase at a price, higher than the agreed to sale price in the deal btw the seller and myself. Would you define that as a lease option or option?
It may sound all bluesky, however I’m looking at concepts now and will work out the details once I have the right idea.
so to my original question and to AJ290’s reply - I can’t provide the money they would need for a DP on the next place, but I would be able to stop their pain by paying the existing mortgage payment. My credit is A+ and would like to keep it that way. So I’m not terribly interested in going to a bank. I’m asking a vague and complex question, but I’m trying to establish whether these theories truly apply to real deals being made every day.
Are sellers likely to agree to this arrangement with me w/out money down? (real world - not I have a book to sell world) I’m sure it’ll take a ‘special’ seller.
When I find a seller who will agree, will they experience any issues with their lender both on the mortgage I’m agreeing to pay or the mortgage they are applying for on the next home? Or is it a non-issue if they simply state the property is “rented” to their lender and it’ll zero out.
Lots of questions here I know -
Are there any sources for learning more about this that are particularly exceptional? Either internet sites or text.
The mortgage payment on this, the old house, will still show up on the seller’s credit report when they go to finance the new house. That will typically impact the underwriting ratios. However, if you sign a lease with them they can include this in the loan package to the new lender. Some (most/all?) lenders will exclude the mortgage payment on the old house from the underwriting housing ratio if your rent payment under the lease covers most or all of the mortgage payment. So, in a nutshell you signing a lease on the old house helps them when it comes to getting a loan on the new house.
Silverback – my first question is why pursue it if (a) there is no equity and (b) value is declining? Is there more to the deal that we’re missing? Unless there is some sound evidence that the market will go up and you’re willing to make a speculative play, or unless you’re planning to enter into an option with a sandwich lease and the rents will allow a strong positive cash flow after giving the seller what they need in lease income, then I’d say “next”.
71tr is correct in that the loan will show up on the seller’s credit until paid. They need to be reminded of this as some sellers are not saavy on the ins and outs of real estate transactions. Some lenders will offset fully the loan payment by the rents received, and will usually require documentation to prove the income is coming in as well as a lease. Some lenders on the other hand will add the lease income to the other household income prior to calculating housing and recurring costs ratios. This is not quite as good for the seller/borrow as it is a more conservative approach. And lenders are to a greater and greater extent leaning towards the conservative side in many areas.
Be sure, if entering into a sandwich lease option, to research the downsides as well as the upsides of this type transaction. Anytime you have a long term engagement between others for the rental, purchase, or sale of real estate and you’re in the middle challenges can arise. Especially when another party’s name is on a loan related to same.
In ANY real estate endeavor always do all you can to learn as much as you can about any strategy you seek to employ.
thank you both for your replies. Aseruti, I’m looking at purchasing a property in the future(say 4 years) for an agreed to price. During that time, I’d like to advertise RTO, and get a future buyer into a 1-2 year lease with the option to purchase at a price, higher than the agreed to sale price in the deal btw the seller and myself. Would you define that as a lease option or option?
to answer your question that looks like a lease option and usually you have to give the seller option money for the l/o you are in whith them.you just have to negotiate with him/her how much if anything.
Are there any sources for learning more about this that are particularly exceptional? Either internet sites or text.
yes there’s plenty of sources out there to learn from starting from this great forums that you’re reading and books out there. just research and read and read and then read some more.
Good luck and God bless.