lease options

The payments your tenant buyer are making is RENT. You may or may not give them a rent credit toward purchase/closing costs when they pay you on time.
Why would they have a paydown? Not sure what you are asking.

The initial option fee will count toward their down payment. They may possibly have to have additional down payment when it comes time for them to refi, depending on the price they will be paying in relation to appraised value and as to whether the value has increased any giving them any equity in the home. (in this market, probably not so much)

I usually structure it so that I can give them $100 of their rent as a credit toward closing costs or principle, but no higher than that.

Every deal is individual. That is why you need to understand what you are doing on these when you structure them. You don't want to be the one having to bring money to the table.

Karen

get 3.5% down as the option fee so that their down payment requirement with FHA is taken care of when they apply down the road for a mortgage. I use to give 1-3 years as a time requirement but find myself now giving 3-5 because of the economy.

thanks everyone for all the great advice....

In addition to the 3 to 5 percent down payment, I run an amortization table at a higher rate such as eight to twelve percent. I explain to them that I am an investor and the interest rate for me is higher as I am an investor.. The amortization table shows that they are paying very little toward the pricipal in the early months of the loan. When I run the amortization table, which is provided in DG tools on the left of the home page, I include enough to pay my taxes and insurance as the rental payment. When I show them the amortization table I tell them that they can pay extra on the principal which will lower the amount to refinance. This becomes a win win for both parties. During this rental option period I show them how they can improve their credit score and hopefully pay me off earlier. I hope this provides some additional guidance for others in similar situations.
Mossy Oak

"When I show them the amortization table I tell them that they can pay extra on the principal which will lower the amount to refinance. This becomes a win win for both parties."

Couple of points...how is it a win/win for the tenant/buyer if they pay down the "principal" and don't exercise their option. I don't know why any T/B would apply more non-refundable money. It would be better if they saved the money and had the use of it until they needed it at close. Also, when you start talking about loans, amortization and principal paydown, you are moving out of the lease/option arena and into an area that is normally associated with buyers, which may cause problems later down the line. Instead of a simple eviction for not paying the rent, you may have to foreclose to get them out of the property. Not to mention compliance with the SAFE Act. Sounds like a bucket of worms a judge might need to sort out. In my opinion, you are leaving yourself open to a lot of legal actions, but I may be wrong. Have you run this by an attorney? Sounds more like you are doing a wrap than a lease/option.

I took some advice from a local investor about getting this property under contract for what the seller owes. But this particular property won't sell because it's too high for cash buyers, and needs some improvements that retail buyers are choosing other homes instead. I could easily find a rent to own buyer, but the seller is completely against it. Does anyone have other ideas how I can not back out of this deal. I really just want to help the seller and not tarnish my name. I would buy it myself and rent it out, but I don't quite have the funds.

Thanks, Gina

What's the underlying financing? Is he current on the payments? What's the house worth now vs the ARV? How much work needed? What will it rent for? Is it in rentable condition now or does it need some work? What is his motivation to sell?

Gina. Please check your other post. You also don't want to hijack other threads, as they consider that a big no no on here. Tammy

The monthly lease payments do not go towards the purchase price
Though I commonly see this
There is the $700 monthly lease payment but then also an additional $100 option payment
The option payment exercises their option to buy & goes towards the principal purchase amount of the property where the lease payment does not. So in essence they are building a bit of equity into the home as time goes on.
If they don't pay their option payment then they have forfeited their option to purchase the property for the predetermine price by the predetermined date that was agreed on.
But always understand contracts are negotiable.

The posts above provide some excellent suggestions. Please realize that certain elements of an option agreement are negotiable, a few are requirements. The required components to make a legal option agreement are:
1) Specified term/length of agreement;
2) Specified purchase price
3) Specified property, optionor and optionee
4) Option Consideration--the inclusion of option consideration is required, but the amount is negotiable.

Pretty much everything else is negotiable, including the amount of the option consideration, payment schedule, any deposits or other inclusions in the agreement.
Some investors structure agreements to make it as difficult as possible for the buyer to exercise their option and purchase the property. Most are more moral and ethical than that, and do everything they can to help tenant buyers to successfully purchase the property. But since we cannot force a person to buy, we still have to make the arrangements as protective to our interests as possible.
One interesting thing that I have done with my tenant/buyers is to introduce them to my mortgage broker who, I say, will help to evaluate what they need to do to qualify for a loan during their option period, and I indicate that he is going to be their connection as they make decisions that could impact their credit-worthiness.
Lease Options can be very fair to all parties concerned, I've used them to purchase my own property twice, and in countless other examples to assist both sellers and tenant/buyers to accomplish their needs. I wish I could say that in every instance the tenant buyer successfully purchased the property, but human nature is a funny thing to deal with, and the best we can offer is an opportunity, it is up to the tenant/buyer to seize it and make it work for them. As long as we carefully explain risks, we are walking the high road.