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Message
Are lease-purchase contracts worth it for the landlord?
Posted on 4/7/15 at 6:35 am
Posted on 4/7/15 at 6:35 am
I have some good tenants who are working towards buying a home. They want to buy my home, but they don't have the credit or 20% for a down payment.
Here's the story on them, which I confirmed as best I could when doing a tenet screening:
The husband got married at 20 to an older girl. They bought a house a few months later, but after a messy divorce just a few years after getting married, losing the house along with some other unpaid debt screwed up his credit. Got his life together around age 26, met his current wife, and now at 31, he's been employed and promoted in the same company for the last few years. Makes a little over $50k. Because of his messed up credit, he didn't realize until recently that doing nothing to fix it would, you know, not actually fix it. He has been steadily rebuilding his credit over the last few years to some success.
His wife comes from money but apparently not enough money to teach her how to manage finances. She never had a credit card in her name, never owned her own car, never had any loans, and had a credit score of 0. She is also employed and has been for the last few years and makes about the same as her husband.
They're trying to be smart about their finances, which I respect. They want to build their credit score to qualify for a conventional loan, and they want to put down 20% to avoid PMI.
These are good people. And instead of renewing the lease for the next year, they would like to do a lease-purchase because they like the house and like the area, and their children are forming relationships in the neighborhood.
tl;dr - My good tenants want to switch to a lease-purchase. Good idea for me? Any sites or resources I should look into to make this a valid contract?
Here's the story on them, which I confirmed as best I could when doing a tenet screening:
The husband got married at 20 to an older girl. They bought a house a few months later, but after a messy divorce just a few years after getting married, losing the house along with some other unpaid debt screwed up his credit. Got his life together around age 26, met his current wife, and now at 31, he's been employed and promoted in the same company for the last few years. Makes a little over $50k. Because of his messed up credit, he didn't realize until recently that doing nothing to fix it would, you know, not actually fix it. He has been steadily rebuilding his credit over the last few years to some success.
His wife comes from money but apparently not enough money to teach her how to manage finances. She never had a credit card in her name, never owned her own car, never had any loans, and had a credit score of 0. She is also employed and has been for the last few years and makes about the same as her husband.
They're trying to be smart about their finances, which I respect. They want to build their credit score to qualify for a conventional loan, and they want to put down 20% to avoid PMI.
These are good people. And instead of renewing the lease for the next year, they would like to do a lease-purchase because they like the house and like the area, and their children are forming relationships in the neighborhood.
tl;dr - My good tenants want to switch to a lease-purchase. Good idea for me? Any sites or resources I should look into to make this a valid contract?
This post was edited on 4/7/15 at 12:01 pm
4
Posted on 4/7/15 at 8:00 am to StringedInstruments
Look into owner financing instead. They buy it outright and you hold the mortgage. You get your purchase price plus all the front-loaded interest income with no ownership headaches. Sweet.
Whichever way you go, you'll need a real estate attorney to draw up the documents and handle the closing.
Whichever way you go, you'll need a real estate attorney to draw up the documents and handle the closing.
This post was edited on 4/7/15 at 8:01 am
Posted on 4/7/15 at 9:25 am to Layabout
What are your plans for the house? Do you want to hold it for long term investment or unload it?
There is a "contract for deed" or "bond for deed" that you can Google. You hold title until they finish up all the payments. With this arrangement, they should put a substantial amount upfront.
I would not sell it to them and carry the financing/hold the paper. That is what bankers are for.
I understand they are "nice tenants", but you should be looking out for yourself first. I'm sure you are a "nice landlord."
There is a "contract for deed" or "bond for deed" that you can Google. You hold title until they finish up all the payments. With this arrangement, they should put a substantial amount upfront.
I would not sell it to them and carry the financing/hold the paper. That is what bankers are for.
I understand they are "nice tenants", but you should be looking out for yourself first. I'm sure you are a "nice landlord."
Posted on 4/7/15 at 9:33 am to ItzMe1972
And by the way, they should be paying more per month on the lease purchase.
What if they default on the lease purchase? Do they then have "partial ownership" or "equitable title?"
Once again as a landlord, you should be looking out for what's best for you, not what's best for them.
If it were me, I'd only sell it to them if I wanted to unload it. And then only if they got bank financing.
My two cents....
What if they default on the lease purchase? Do they then have "partial ownership" or "equitable title?"
Once again as a landlord, you should be looking out for what's best for you, not what's best for them.
If it were me, I'd only sell it to them if I wanted to unload it. And then only if they got bank financing.
My two cents....
Posted on 4/7/15 at 11:40 am to StringedInstruments
In a lease purchase situation, you charge extra each month, that extra goes towards their future down payment. At a later date, if they do buy, the extra payments go toward their down payment. If they don't buy, you keep the money. Everything else stays just like it is now - you are the landlord, they are the tenant.
The next option is a contract for deed or bond for deed. In this arrangement, they "buy" the house, but they don't get the deed for the house until they satisfy the contract. The contract is usually for a term - say 2 or 3 years. You agree on a sales price. There is a closing. They have the responsibilities of ownership and most of the rights. You are no longer a landlord. You set up an amortization based on a 30 year note. However, the term ends after 2 or 3 years, and they satisfy the contract by refinancing into a traditional mortgage. You need to charge them a down payment high enough to make sure they don't walk away, and charge them an interest rate high enough to account for the risk and to ensure you can pay the mortgage on the house. See... you still owe the mortgage if there is one. You also need to make sure you are listed as an insured on the insurance policy.
Owner financing is an option if there is no mortgage, because if there is a mortgage, you have to pay it off to do owner financing.
The next option is a contract for deed or bond for deed. In this arrangement, they "buy" the house, but they don't get the deed for the house until they satisfy the contract. The contract is usually for a term - say 2 or 3 years. You agree on a sales price. There is a closing. They have the responsibilities of ownership and most of the rights. You are no longer a landlord. You set up an amortization based on a 30 year note. However, the term ends after 2 or 3 years, and they satisfy the contract by refinancing into a traditional mortgage. You need to charge them a down payment high enough to make sure they don't walk away, and charge them an interest rate high enough to account for the risk and to ensure you can pay the mortgage on the house. See... you still owe the mortgage if there is one. You also need to make sure you are listed as an insured on the insurance policy.
Owner financing is an option if there is no mortgage, because if there is a mortgage, you have to pay it off to do owner financing.
Posted on 4/7/15 at 12:06 pm to LSUFanHouston
quote:
In a lease purchase situation, you charge extra each month, that extra goes towards their future down payment. At a later date, if they do buy, the extra payments go toward their down payment. If they don't buy, you keep the money. Everything else stays just like it is now - you are the landlord, they are the tenant.
The next option is a contract for deed or bond for deed. In this arrangement, they "buy" the house, but they don't get the deed for the house until they satisfy the contract. The contract is usually for a term - say 2 or 3 years. You agree on a sales price. There is a closing. They have the responsibilities of ownership and most of the rights. You are no longer a landlord. You set up an amortization based on a 30 year note. However, the term ends after 2 or 3 years, and they satisfy the contract by refinancing into a traditional mortgage. You need to charge them a down payment high enough to make sure they don't walk away, and charge them an interest rate high enough to account for the risk and to ensure you can pay the mortgage on the house. See... you still owe the mortgage if there is one. You also need to make sure you are listed as an insured on the insurance policy.
Owner financing is an option if there is no mortgage, because if there is a mortgage, you have to pay it off to do owner financing.
Interesting.
I was thinking the lease-purchase is more like the contract for deed option.
To answer others - I want to unload this house. I'm an accidental landlord. Moved to a new city and couldn't sell the house.
I'd really like to no longer be a landlord. It's costing me money. I'm making no profit. In fact, I'm taking a loss each month when considering some of the unexpected repairs (new A/C unit).
So with the contract for deed option, they get financing through a bank to pay me $200k while I continue to pay $200k to my lender. Then after the term, there is a refinance where the $200k to my lender is transferred to them and their lender?
Posted on 4/7/15 at 12:32 pm to StringedInstruments
Have they even tried to get financed? I know a guy that went to a small community bank and got a mortgage 2 weeks after filing bankruptcy with 10% down. Rate wasn't great, but better than renting.
Posted on 4/7/15 at 12:38 pm to StringedInstruments
quote:
So with the contract for deed option, they get financing through a bank to pay me $200k while I continue to pay $200k to my lender. Then after the term, there is a refinance where the $200k to my lender is transferred to them and their lender?
No. If they can get a mortgage, there is no need for a contract for deed.
Basically, they are paying you money, which you turn around and use to pay your mortgage. Then when their credit picks up, they go to a bank and get their own funding, and you are no longer in the deal. You take their money, pay off your mortgage, and life goes on. If they pay on the contract for deed for so many months, the banks consider it a refinance as opposed to a purchase money loan. Just terminology.
Posted on 4/7/15 at 2:35 pm to Layabout
quote:
Look into owner financing instead. They buy it outright and you hold the mortgage.
no no no no no
Posted on 4/7/15 at 3:43 pm to TigerDeacon
quote:
no no no no no
Well, come on now. You gotta give a little more than that.
Posted on 4/7/15 at 4:51 pm to StringedInstruments
I've owner financed before.
Depending on the condition of the house, I try and get a lot up front. If the house is a POS, I take much less so they have the money to fix the house up.
I charge 8% interest and about 10k more than the house is worth.
Depending on the condition of the house, I try and get a lot up front. If the house is a POS, I take much less so they have the money to fix the house up.
I charge 8% interest and about 10k more than the house is worth.
Posted on 4/8/15 at 6:27 am to I Love Bama
quote:
I charge 8% interest and about 10k more than the house is worth.
This is the ONLY way it would make sense to me. The headaches, paperwork, time, and infinite possible problems with owner financing have to worth a LOT.
Your time and effort are much better spent elsewhere.
Posted on 4/8/15 at 11:31 am to Ole War Skule
If you like them & they're "good people", why not try to help them get a mortgage? Look around for first-time homebuyer programs in your community, call whoever you bank with and give 'em a reference, send them to the local credit union. They obviously lack financial savvy, so maybe they just don't understand how to go through the process. Their demonstrated ability to pay rent will matter to the bank.
I sold my last house to a nice young couple who needed a push to get a mortgage. They were using a traditional broker who didn't understand the off and on nature of the husband's movie-industry work. So the mortgage broker wouldn't touch 'em. I sent them over to my banker, who actually understood that the husband's parents live one street away (and own rental property in the area), and his aunt lives two blocks away. IOW, someone who could see the young couple as something more than a column of numbers on paper. My bank was happy to lend 'em money.
But I wouldn't do lease/purchase or owner financing.
I sold my last house to a nice young couple who needed a push to get a mortgage. They were using a traditional broker who didn't understand the off and on nature of the husband's movie-industry work. So the mortgage broker wouldn't touch 'em. I sent them over to my banker, who actually understood that the husband's parents live one street away (and own rental property in the area), and his aunt lives two blocks away. IOW, someone who could see the young couple as something more than a column of numbers on paper. My bank was happy to lend 'em money.
But I wouldn't do lease/purchase or owner financing.
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