17 Apr What To Do When Your Buyer Has No Credit History
Rent to own deals are perfect for people who are building credit or have bad credit due to some past circumstances. We provide them with a way to build their credit and purchase a home when they would be otherwise unable to do so. But what if the buyer has no credit history whatsoever? It might sound crazy, but it does happen.
In this case, our Associate found a buyer who is self-employed and has paid for everything in his life with cash. So when they checked his credit history, nothing came up. Here's what they did…
The seller who needs to move
The source of this deal was an expired listing, and the seller was an older couple that was looking to move to Florida. The husband was actually a retired IRS agent, which might scare some people — but he was already familiar with terms deals because of his work as an IRS agent! He had done audits where terms deals were involved, so he knew how they worked and knew far more than the average person.
Their house had been on the market for a year, and they needed to get moving down to Florida. They were pre-approved to build a home and they had to get their house sold before they could start that process. They didn't need the money right away, but they did need to lower their debt-to-income ratio to get started on the construction process, and this deal did exactly that.
The final thing that sold them on a rent to own deal was the lack of realtor fees and the guaranteed cash equity. They're saving around 6% in realtor fees and commissions, as well as getting all of their equity in cash at the end of the term.
People often ask us how we “convince” sellers to do terms deals, and we always say the same thing: We don't convince anyone! We simply explain how we buy hassle free (we're not realtors!) and all the benefits that can provide. This example—along with many others on this column and our Youtube channel—should show you that there are many benefits to terms deals for sellers.
The buyer with no credit history
And on the buyer side, there was a clear motivation as well. As you know, this buyer had no credit history so purchasing a home conventionally was out of the question. A rent to own deal would be one of the only ways he could purchase a home, and he was thrilled to be given the opportunity.
The only issue was that a virtual signing wouldn't work. To put it simply, we use a system that incorporates a credit check when we structure deals virtually—in this case, that system wouldn't work because it wouldn't be able to pull any type of credit history.
The buyer was also in a different location than our Associate, which complicated things further. But this really isn't all that difficult — our Associate simply talked to their attorney, who was able to find a colleague near the buyer that could do the signing in-person. By doing the signing in-person, it removed the need for that credit check.
Real estate deals don't always go as planned! There will always be nuances like this, but with so many ways to pivot, there is always a way to make the deal happen.
All 3 Paydays™
Now that you understand all the nuances to this deal, let's take a look at the numbers. This was a sandwich lease purchase, and because it's a sandwich lease we're not even going to discuss a “purchase price.”
The only thing that matters is the underlying debt on the property and the equity owed to the seller. In this case, there was $318,756 left on the mortgage and the seller wanted $99,000 in equity. Our Associate agreed to this and structured a 24-month sandwich lease purchase.
Payday #1 is the down payment, and our Associate received 3% upfront, plus the first month's rent—$16,178 in total. (We almost always specify in our contracts that we don't start making payments to the seller until 30 days after the home is occupied, meaning we capture that first month's rent.)
In order to get to 10% by the end of the first year, our Associate also structured two more payments of $15,715 in the coming months. That's a total of $47,608 for Payday #1.
Payday #2, the monthly spread, came out to $179 per month. That's the rent from the buyer, $2,708, minus the PITI payment (Principal, Insurance, Taxes, and Interest) to the seller, $2,529. Over 24 months, that comes out to $4,296. Not all that significant, but the other Paydays make up for it.
Payday #3 is the markup on the sale of the home. Our Associate was able to settle on a sale price of $448,999. Although we didn't mention a purchase price, if you remove the underlying debt and equity, the markup comes to $31,243. Add in the principal paydown ($839 per month or $20,136 in total) and remove the down payment, and our Associate is left with $6,479 for Payday #3.
Again, these last two Paydays might not seem like much—but don't forget Payday #1! When you factor in that down payment of $47,608, the total for All 3 Paydays™ comes out to $58,383!
And while that Payday is great, let's not forget that our Associate was able to help this seller achieve their lifelong dream of moving to Florida, while also helping a self-employed buyer get into his first ever home. That's what we're here for!
We've shared lots more information about creative real estate deal structure on our YouTube channel. Follow us to learn more each Sunday!