Here is a case study of how I might work with a lease-option buyer on the purchase of the property highlighted in the last few blogs. In my next blog, I will discuss how an investor would profit by underwriting the mortgage for the lease-option buyer.
On a lease option, I typically pay the selling agent 1% of their commission up front, and the remainder when the option is exercised. So the down payment has to cover commission costs, option fee, and other related costs. I typically like to see 3 1/2 - 5% down as a non-refundable option fee. I used to bump up the purchase price by about 10% per year for seller financing and future value on an option, but in this market I'd be okay with $357,500 as a purchase price in three years for the house parcel.
Monthly payments should be equivalent to what monthly payments would be on the take-out loan, including taxes and insurance. Lenders like to see this too, as it demonstrates ability to repay.
If the buyer went FHA with a loan amount of $345,000, the FHA funding fee would be $6,000 so the loan would be for $351,000 then the payment with a 5.50% rate would be $1993 plus $161 for Mortgage Insurance (MI), and $308 for taxes and $50 for a total of $2512 a month.
Assuming the buyer put $12,500 down as an option fee (applied toward the purchase price), then monthly payments on the loan amount above would be roughly $2500 with taxes and insurance. I would be willing to apply $500 of the monthly rent as rent credit towards the purchase price, assuming payments were made on time.
At the end of the three year term, the house would be purchased for $357,500 less the option fee of $12,500 and rent credits of $18,000. The loan amount would actually be for $337,000--and payments would be even less per month. This is a good option for a buyer who cannot qualify for a loan today, but may in 2-3 years.
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