Can someone clarify what the difference is between crediting the down payment vs. crediting the purchase price? I just assumed that giving a rent credit towards the down payment would naturally reduce the purchase price. Thanks in advance for your help!
I’m not positve, but I believe:
If they have 5,000 in credits towards the purchase price, then you reduce that 5,000 off of their price when they buy.
If they have 7,000 towards the down payment you keep that money so when they buy if the lenders requires a down payment you have it ready for them.
You should also get the down payment credit in a differnt check and deposit it in seperate bank account.
Anyone correct me if I’m wrong…
i agree with the seperate checks for sure.
you could do it either way from my understanding, as long as you document it correctly. if the equity is there, it would be much easier to get your buyer approved to show the money as earnest money/down payment, and leave the purchase price set.
also, i think you don’t have to keep the money until you close, you could go ahead and invest it or whatever, just make sure its laid out in the option contract, and make sure you papertrail it really well (and tell your renter to also) for when their lender asks for proof, etc… and they will–i guarantee.
in fact, now that i think about it, i had a deal like this when i was a loan officer and it was a complete nightmare because the renter paid in cash… what a mess, we couldnt prove anything on paper to really satisfy the lender. so make them pay by check! papertrail everything!
that way your contract to purchase would read (for example):
$150,000 purchase price
-$5000 earnest money deposited with seller (at the start of the L/O plus any you credit from their rent payment)
=$145,000 loan amount due at closing
I too do not claim to know it all (or much for that matter!), so please anyone correct me…
I now see that you’re really not reducing the purchase price with rent credit - you’re just getting the back-end profit sooner.
Thanks to you both for the advice - it was very helpful. I will be sure to document everything!
Actually, you would credit the 5k and whatever amount you designate monthly in the contract. If your contract states $100.00 per monthly payment will be credited and they’ve lived there for a year, it would look like this:
Purchase Price: $150,000.00
Option Money (down pymt): $ 5000.00
Rent Credit: $ 1200.00
$150,000 - $5000 - $1200 = Purchase Price $143,800.00
So if the option price I had with the seller was $140K then my back-end profit would be $3800 with the rent credit or $5K without it. That’s what I meant by getting the back-end profit sooner. Right?
thanks for your help
scorpiogirl:
i guess you could do it that way, but what are the benefits?
wouldn’t it get a little sloppy if the purchase price is changing month by month?
[i]Purchase Price: $150,000.00
Option Money (down pymt): $ 5000.00
Rent Credit: $ 1200.00
$150,000 - $5000 - $1200 = Purchase Price $143,800.00[/i]
how does a down payment change the purchase price? technically a down payment should change the loan amount or the amount due at closing, not the purchase price, right?
i think your figure above should read: “amount due at closing or loan amount = $143,800”
if i am wrong could you explain, please. this is how any other contract would be written. if you buy a house, your down payment doesn’t reduce the selling price, it reduces the amount you have left to pay (loan amount), same with a car loan, etc. etc.
I think we’re saying the same thing. I was just looking at how a credit would reduce my back-end profit. In my example, I wasn’t changing the purchase price. My example has $140K for my option price with the SELLER I optioned the property from. I just used that as an example to help in figuring out how the credit would affect the final numbers. I understand the purchase price would not change - only what is owed to me once the buyer exercises their option. Thanks!
The 5K is not a “down payment” it is “option money” meaning that if they choose the “option” to purchase the home, this money would be credited toward the purchase price.
Also there is a lease in place for a specified amount of time (12 months), the price would not be changing month to month. They would have to stay for the duration of the lease and if there were no late payments, the $1200.00 would also be credited towards the purchase price.
The purchase price is what you and the buyer have agreed on when the duration of the lease is up.
The loan amount is what the seller (you) still owes on the loan. The buyer need not know this information - if you so choose.
You can also refer to the next thread for more (the same) info.
Clarification on lease with option to buy
If they don’t exercise the option, that money is all yours.
I know I am working on using Options to gain control of land for next to nothing.