What if the leasee wants out?

General Real Estate Investing
1

Scenario: find a seller willing to give you a lease option. You find a qualified leasee and collect money down (say 5000), they sign 2yr lease. At end of lease they decide they no longer wish to purchase home or they can’t qualify for financing. How do you break it to the original seller that their loan won’t be paid off at full retail this year? will the tenant buyer want his “money down” back?
I’m ready to make some deals happen, but worried about the what if’s.

2

How you frame your offer can eliminate this problem.

Don’t make promises you can’t keep.

Most L/O’s don’t close. Why is that?

Because they’re rarely just disguised sales with ‘extra long’ escrow periods.

Instead…

  • The option price was based on the “PFA” formula. (Plucked from air)
  • The Buyer was gambling that the magic unicorn of credit repair would appear in the nick of time.
  • The buyer was depending on an elusive raise to qualify for a new loan.
  • Aunt Edna failed to die on time, and so the inheritance which would have provided the down payment, never materialized. (Of course Aunt Edna is now really unwelcome at family reunions.)
  • The house won’t appraise for the Seller’s “PFA” price.
  • The Seller left the Buyer to his own devices about getting new financing.
  • The Buyer was making his payments directly to the Seller, instead of a 3rd party, and now the bank won’t accept the payment history, or 'down payment rent credits" as legitimate.
  • The Buyer is a flake.
  • The Seller just wanted ‘something for nothing.’

Solution?

Treat the transaction like a legitimate sale with a long escrow period and use professional services to document every aspect of the transction.

Or get more money up front. Big down payments overcome a lot of bad credit.

Even today, with 25% down, a mule can qualify for a home loan, if the appraisal comes out.

3

There should be two agreements here. One is for the traditional lease and the second for the lease option. In my experience, the money paid for the rent premium (above and beyond the market rent) is non-refundable. Of course you should have an attorney draft your at least your first agreement to make sure that this clause is in there. So that if the tenant does not exercise the option, you can tell the owner that they earned “extra rent” off the property as a plus side to losing the option.