Feb

5

I have received two calls from sellers on sandwich lease/option deals in the last two months. The conversations have gone something like this:

Seller: Hello Kevin. I have some bad news.

Kevin: Yes, what is it?

Seller: I just got a letter from my mortgage company and my rate is going up

Kevin: When is it going up and what is it going to adjust to?

Seller: Next month and my payment is jumping up $700 per month

From here I got as much information about their current financial situation and their plans when the adjustments hit. The results varied. One was able to do a home equity loan on their primary for the cash required to refinance the property and keep the payments affordable. The bad news was they picked up another mortgage on their primary. We are not so lucky with the other.

The value of the house came down and he does not have enough equity in his primary to pull out any cash. He has great credit but cannot afford the new payments and he is in an agreement with me for three more years.

I may end up losing my deal. I signed it up two years ago and have only had one tenant the whole time. The tenant already told me he does not want to buy the place but he does not want to move and his check is early every single month. One of the best tenants I have ever had. The value of the house decreased below my option price so I am not expecting to exercise my option. The problem is I am making almost $250 per month and have no maintenance obligations. This monthly income is expected to increase as I raise rents over the next three years.

The plan now is to let the seller fall behind on his payments and try to do a modification with the mortgage company. This is going to hurt his credit and there is no guarantee that the lender will do a modification and even if they do, there is no guarantee that the payments will be affordable. In this case I will be left with a decision of taking the property subject to or losing it all together.

If I take it subject to, I will be taking on a debt of more then the property value and with payments higher then I can rent the home for. This does not sound like a viable option to me.

Here is my $.02: My advice is to always get a copy of the actual note when you do a lease option and be sure you understand if and when there will be adjustments. You will want to stay in touch with your seller and if you feel they cannot afford it, you may want to have them refinance now instead of waiting for the adjustment.

If you already have a lease option and do not know when your seller’s payments are changing, call them and ask. Lets face it, rates are low right now and home prices may continue to fall. If your seller becomes over extended it may be tough to refinance once the payments adjust. It may make sense to have them refinance now while they still can.

The other option will be to have your tenant buyer buy the home. We all know that not all tenant buyers will buy. Sometimes it is simply because they do not think they will qualify. If you have a tenant buyer getting close to the end of their term, let us know if you want us to look into refinancing them.

The bottom line is you must stay in control and not get lazy. Learn from my mistake.

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