Another step done... and more about getting started

Another step in the process is completed. My Realtor called today and she has received the sign-off on my response to the buyer's inspection checklist. All the issues on the list that I will fix are fixed, so now, I just sit back and wait until the 30th. The termite inspection and appraisal are the last outstanding issues. I'm not paying for the termite inspection and for all I know, it might have happened already. I don't expect any problems with the appraisal - the selling price might be a bit high, but it's not out of the ballpark with the comps, so it should be ok.

I realized that in my last post, I neglicted to mention the specifics of the lease-purchase deal I had when I rented the property. (Most of the info was there, just scattered over various places.) Here's what my deal was:

Rent was $1,100 a month for two years. The buyer paid a $3,000 non-refundable option fee for the right (but not the obligation) to purchase the house anytime within those two years for a price of $125,000. The $3,000 would count towards his down payment. None of the monthly rent would be credited towards the down payment. The buyer also contributed a $1,000 earnest money deposit for the purchase of the house. This was also non-refundable. A late rent fee of $25 was due if the rent was not received by the 5th of the month. (In retrospect, this should have been done differently. Now, I would charge a $5 per day late fee for each day after the 1st that the rent is late and if rent is received by the 5th, the late fee is waived. Thus, if the rent was 5 days late, I'd still get a $25 late fee plus it would increase each day after that, but the tenant would still not have any late fees if he paid by the 5th.)

At the time, the fair market value of the house was $120,000. The selling price in the deal was $5,000 higher to account for future appreciation. As I know now, the appreciation was quite a bit more, but at the time, I was scared of going too much higher than the current FMV in case it might scare buyers away.

The $1,000 earnest money was a surprise to me. I didn't ask for it, so it was probably something either my agent or the buyer's agent recommended. If neither one had much experience with lease-options (and I don't think they did), I can see why they asked for this - it's how "normal" purchases are done. I didn't say anything. If the buyer wanted to put up more non-refundable money, that was fine with me.

I also asked my agent about crediting a portion of the rent towards the down payment. She said she hadn't seen that done before, so I went ahead and left it out. I figured if the buyer wanted it, he'd ask and I could always use that as a negotiation point. He never asked.

Everything was handled through an escrow company. The lease was recorded, as was the option to purchase the property. The escrow company's account servicing department handled the monthly details of collecting the rent from the tenant, paying my mortgage, and sending me the remaining rent. They charged $15 a month for this service, paid for by the buyer. I should note that they were not that great at servicing the account. My tenant was late a couple of times and each time, it was I who had to call the escrow company and have them notify my tenant. They sent out a letter, which was copied to me, informing him he was late and of the late charges. The also charged him $25 for sending this letter.

A lease-option (and, by the way, I use that term interchangably with lease-purchase, although purists probably wouldn't agree with me) is generally used by people with poor credit, hard to document income, or some other problems that make getting a loan difficult. This type of deal allows them to lock in a price for a home, make a small down payment, possibly earn credits towards the price via rent, and gives them 1-2 years to work on fixing their credit scores to obtain a loan in the future. I was told my tenant worked as a welder and had been at his current job for about 1 year. That was the extent of my research on him. I didn't bother with a credit check - given the reasons people typically use a lease-option, I did not expect his report to be sparkling clean and it was ok with me. $4,000 of non-refundable money was, in effect, a very large security deposit.

And that was it. It's interesting to note that I never once met the tenant. Even when he moved out, it was his girlfriend who met me at the house and gave me the keys. And using an escrow company allowed me to let them be the bad guy and be the ones to contact him when his rent was late (which only happened twice - and the second time I started the eviction process and he paid promptly).

So there you have it.. Things went super smoothly for about a year. No late payments, no maintenance calls. Just a check coming in each month for a hundred and some-odd dollars.

Coming up next - how I refinanced to increase my cashflow.