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Seller Can’t Lease Option Because They Need Cash For Their New Home
Joe: Hey, it’s Joe Crump. This next question is from John Fund. Hey, John. Old friend. John says, “The seller can’t lease option because he needs the cash to move in to a new house.” There’s a few ways they can get the cash out of the property, and one is they could go and refinance it and pull the cash out that way and that way they would keep the property and it’s going to be a wonderful investment for them in the future. So, holding on to that property can be very, very valuable to that seller, you know, if they hold on to it for the long term.
Joe: They could also, if the buyer does exercise the option, which isn’t likely, but if they do exercise the option, they’ll make more money. They won’t have to pay a realtor fee, they’ll sell it for top dollar, there’s a lot of advantages. They won’t have to do repairs to it. A lot of advantages to that. If they don’t sell it they’ll get it back, the value will go up, we’ll sell it for them again on another lease option and they’ll be able to hold on to that property and any money that they, you know, they have to pay on a mortgage will be covered by the rent that’s coming in.
Joe: It might be possible that the person who’s buying another property doesn’t really need much cash to buy another property. If they use and FHA loan, they only need a few percent. They could get the seller to pay their closing costs up to 6% of closing costs and prepaids. And they’d only need about 3% to move into the next property which may not be a problem for them. So that’s another thing.
Joe: The other things is, oh, I’m, the seller may say, well, I’m concerned that I won’t qualify for the loan because I only qualify for this amount and if I have two properties I won’t qualify for the second one. And, but that’s not the problem because the income from the property will offset his debt service. And typically a lender will allow 75% of the income to apply towards debt service. So if he’s got a property that he has $1,000 a month income on and his mortgage is $750 a month, well, that would be complete wash because the bank would allow $750 of that $1,000 payment to apply towards the mortgage and it would pay that mortgage amount and so he would have no negative cash flow on that. He would have, it wouldn’t affect his debt service at all, or his debt ratios at all. So that’s usually not a problem either.
Joe: Now, one problem that we do come across occasionally is the lender will say we’ll do this, but you have to have experience as a landlord. And this particular seller maybe has no experience as a landlord. So, he can’t just go out and get experience except over time. So, what we do instead is we get them with a property manager and we put the property with a property manager and the banks are usually good, oh, yeah, they’ve got a property manager, they’ve got a tenant, they’ve got this much income, we’ll allow 75% of that income to apply towards their debt service and offset their debt ratios. So it’s not usually a problem.
Joe: So those are different ways that you can address that issue if you ever come across that objection, which you will, when you’re talking to sellers using the For Rent Method.
Joe: All right. I hope that helps.