I recently got approved for 205K. The home I really love is 300K. The owner of the 300K is willing to do a

Asked by Shakira, Philadelphia, PA Mon Apr 21, 2008

2 year lease purchase for 2,000 a month. 200 dollars of month will go towards the purchase. Is this a good move or should I buy what I got approved for??

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Don Tepper, Agent, Burke, VA
Mon Apr 21, 2008
A couple of questions to consider:

What would be the fair market rent for the home, with no option attached to it? It should be no less than $1,800. It's OK for you to pay a bit more than fair market rent, but not a whole lot. So, if fair market rent is, let's say, $1,500, it's not a good deal, especially for the option credit you're receiving. On the other hand, if fair market rent is $2,000, then that's OK.

Also, I like to offer (and to see) the option credit be about 20% of the amount you pay every month. So, on a $2,000 a month lease option, a more attractive option amount is around $400. Now, that's negotiable, of course. At one time, for one property, I offered a 100% option credit.

Also, what is the property currently worth, and what's the option price? Is the option price $300,000? If so, what's it worth now? All real estate is local, but I wouldn't depend on much appreciation in one or two years. And remember, when you exercise the option, the house has to appraise for the option amount. So if the strike price is $300,000, but the house only appraises for $290,000, you'd have to come up with another $10,000 at closing. Or extend the option (if the seller permits--you must include a provision allowing you to extend the option for additional consideration). Or the seller can reduce the price to the appraisal amount. You could include a provision requiring that if the property is appraised for less than $300,000, it will be sold at the lower, appraisal price.

Is a two-year option OK with you? I don't know your finances, your credit, or other factors. But if you're only approved now for $205,000, you want the option to be long enough so that you'll be able to qualify for the purchase when you try to exercise the option. Maybe that has to do with an increase in your income over that period of time. Maybe it has to do, in part, with the option credits you'll accumulate. (That's one reason I suggest a higher percentage of your payment go toward purchase.) Maybe it has to do with cleaning up some credit glitches. (Allow 9-12 months for that.)

How much, if anything, does the seller want as an up-front option fee? Sellers would like as much as possible. Tenant-buyers would be better protected by putting up less. With the numbers you're talking about, you'd be better off putting up $6,000 or less; the seller may want as much as $15,000. That's all negotiable. And understand that if you don't exercise the option, you will lose that option fee.

Who will be responsible for maintenance and repairs on the home during the lease-option? Ideally, you'd like the seller to be responsible for everything, just as if you were renting. The seller may want you to be responsible, or at least responsible up to a certain amount--i.e, $50 per occurrence. One thing some owners do is buy a homeowner's warranty. They cost about $400. You'd pay the deductible--often around $55 per occurrence. Then the warranty would pay the rest.

There are a lot of other things to consider: How to protect yourself in the event the owner runs into financial problems or tries to sell the property? (Quick answers: Have the owner sign a document allowing you to contact their lender to make sure that payments are current. And file a "Memorandum of Agreement" to cloud title.)

I'm not a lawyer, so this isn't legal advice. For that, you do need a lawyer.

So, if you can satisfactorilly answer those questions: If the house is worth $300,000 or less, if the fair market rent is around $2,000, if the initial option fee isn't too high, if you're reasonably confident you'll buy the place at the end of the option, and if you build in some protections for yourself, if may be good deal.

I personally like lease-options. But they're not for everyone. And they're not right in all situations.

Hope that helps.
1 vote
NonRealtor, , 23456
Mon Apr 21, 2008
First, sell your other house. If i understand you, after 2 years you can buy this house for 290K. the problem is that you only qualify for 205K. After 2 years, you still don't qualify for a big enough loan.
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