OfflineHi everyone. I'm about to engage in a lease option deal. My problem is the seller is upside down in the mortgage. My intent was to write the lease option so that when it expires, whether it's 3, 4, or 5 years, I was going to put the price of the home to be the fair market value at the time the option was exercised. My question is; how do I cover myself, and my assignee, if the FMV has not risen above the mortgage balance at the time the option is up and the lessee wants to exercise the option?
Thank you in advance to anyone who replies.
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There is no way for you to predict what if the FMV will cover what is left of the mtg. When doing lease options you usually at the very least want to have zero equity and at the very best have alot of equity in the property. On properties that are upside down, I wouldn't do a lease with option to buy.
That said, if there is enough spread between the rent you are paying and what you can charge for rent, you may want to consider doing a sandwich lease, but no option to buy.
Cathy B
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I would steer clear of doing lease options with sellers that are upside down. I know it can be tempting given how many houses are under water, but you wouldn't be doing yourself or your tenant/buyer justice by getting involved with a property that has negative equity.
"You gain strength, courage, and confidence by every experience in which you stop and look fear in the face. Do the things you think you cannot do. Tough times never last, but tough people do"
John,
I will share with you one of the first lessons I learned through DG:
'you make your profit when you BUY the property, not when you SELL it'
Look for a thread by Karen on Lease Options-she posted quite a bit of information on the subject.
Wishing you success,
Valerie
Valerie
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"I was going to put the price of the home to be the fair market value at the time the option was exercised."
What would be the benefit for a tenant/buyer entering into such an agreement?
I agree with everyone else. You don't want to do a L/O on a house that is upside down. In a better market, maybe. If it is no more than 10% upside down. But not in this market.
I think a more common practice of setting the option price is the FMV when you put the house under contract plus your option fee. That way the T/B is getting the benefit of any equity that may accrue in the meantime. Since the Seller is not having to pay any RE fees and is not being negotiated down on the price, this should work for him, too.
Since some markets are still falling, you may even choose to put some type of clause saying that at the time when the T/B was ready to exercise their option to purchase, if the house does not appraise at that number or above, the Seller may renegotiate the selling price.
Just some thoughts.
Karen
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