Don’t option. Do a Non-Option Option. Post 171

 

Coach Mitch’s REFLECTIONS™

 

The concept of the Lease/Option is great.

A renter signs a lease and also buys the option, the potential, to purchase the home.

Tenants certainly do like the idea of being an owner. They are renting your home because they like it and the prospect of owning the home is appealing.

I have done my share of lease-options over the years. I have read that, industry wide, 80% of options expire without being exercised. This seems right because I have never had any optionee consummate a purchase.

The reason tenant’s don’t buy.

With a few exceptions, almost all renters would rather be owners. Since they would like to own, what is stopping them? The tenants credit history is stopping a purchase. Even in the day of the NIC/NAC mortgage, No Income Check / No Asset Check, there were persons who would not qualify because the only thing the bank would check is the credit report.

It is hard to get anything with a 550 FICO.

The reason people are renters is because they can’t get a mortgage. The reason they can’t get a mortgage is because they didn’t pay their bills on time, for a long time. This pool of people is large and their credit is bad. Of the 60% of the population that rents, at least 50% have credit bad enough that a mortgage is very hard to get, especially these days. That’s 30% of the potential buying market that has credit bad enough to deny the ability to get a mortgage. It’s a huge number of people.

Options to purchase are not a panacea.

There are reasons to not option. Granting an option potentially limits the owners ability to sell the property, should he choose, and it complicates an eviction, should it be necessary.

A new, better, clever way to sell an option for your property.

Therefore, I have expanded the lease/option idea and have created a new item: the Non-Option Option™ Coach Mitch’s Non-Option Option™ allows a renter to have the first right of refusal, if/when I desire to sell.

Coach Mitch’s™ Non-Option Option™ is the same as the lease/option in all other ways, excepting that it does not bind me, the seller, as a formal option would.

This is how the Non-Option Option works.

When the prospective tenant agrees to the idea of desiring to purchase, I explain that when they will go to banks to qualify for a mortgage, the option consideration should be the amount paid that was over the fair market rent. That is why some banks will not allow monies deducted from the rent to go toward the down payment. Banking logic dictates that the fair market rent was not paid and an upward adjustment is necessary to protect the banks interest.

Tenants view the “first right of refusal” the same as being an option.

For this opportunity, although labeled as rent, I take an additional amount over the regular fair market rent, which is not refundable, just like a regular option. I limit the total amount that I will allow to go toward the down payment. The renter can continue renting after the limit is reached, but it does not accrue toward a down payment – unless I make an exception, which I have done.

In one home, I receive $300 over the FMR, fair market rent, for the Non-Option Option™. When buying, the renters will have accrued $16000 toward a down payment. Since the $300/month overpayment is on top of the fair market rent, the bank will allow the fully accrued amount toward a down payment. I am trying to get the tenants qualified for a mortgage but their credit scores and buying habits are obstacles. They know this.

Example: The FMR, Fair Market Rent is $1000, the additional rent is $300 = $1300 total rent. The amount going toward a down payment is $300/month, yearly = $3600. The total accrued monies going toward down payment = $16000, over about 4.5 years.

Important

The selling price does not have to be a part of the agreement. At the time of purchase, an appraisal can set the price OR you can set a minimum value that you wish to get and against which the accrued monies will be an offset.

The benefits of Coach Mitch’s™ Non-Option Option™.

This practice has worked well for me. The tenant stays longer, secure that they are saving toward a down payment. I am not tied down to a particular tenant. If the tenant violates the lease, an eviction can proceed in the normal manner because the tenant does not have an inchoate (future) interest in the property, which a judge can view with a raised eyebrow.

The legal language is a simple line in the regular lease stating that, for a certain sum, paid each month, in addition to the normal rent, upon the owners decision to sell, the tenant has the “first right of refusal” to buy the home at a price to be determined. The monies are not refundable should the tenant choose not to purchase the home, or not be able to purchase the home.

The tenant is assuming the risk that you will be fair. Being fair to your tenant is your only requirement.

See Coach Mitch’s “Ridiculously Simple System…”™ for details.

I hope this helps.