If you recall from our last general update, our lease purchase contract on The Corn House is about to expire at the end of August. Given that the buyers hadn’t much improved their credit since April, and worse yet that they had bounced a rent check (that they immediately replaced with a cashier’s check), we needed to sit down with them to have a serious heart-to-heart conversation.
We were considering letting the contract end, kicking them out, and then putting the house back on the market to sell, but we wanted to get some feedback from them before making any final decisions. It’s worth noting that these buyers are very good people and are serious about *wanting* to buy the house. In fact, they have already done a good bit of improvements to the house, including replacing some cheap light fixtures with nicer ones, improving the landscaping, etc. So, while we’ve never questioned their sincerity at following through with the purchase, we’re concerned that they don’t have the knowledge or discipline to actually make it happen.
It’s also worth noting that these buyers are paying a large fee each month that will go towards their down-payment and purchase should they buy the house. While market rents in this area are probably about $900-950/month, these buyers are paying $1000 per month in rent and then another $500 per month towards the purchase of the house should they exercise their option to buy. Given that, we’re making out well financially even if they never buy the house.
But, we don’t want to take advantage of them by having them continue to pay large sums towards a house they can never purchase, and we also want to sell the house as quickly as possible, as we purchased it for all-cash and a have a lot of equity tied up in the property.
When we got to the house to speak with them, they were practically in tears. They knew we were considering ending the contract, but clearly weren’t ready to give up the house. They had already written out the next two months rent checks (in hopes we’d extend the contract) and they provided proof that they were actually working with a credit repair company to try to improve their credit. Both of these things were reassuring, and again, given that we are making good money off these buyers even if they never buy the house, we just wanted to see that they were serious in their efforts.
In the end, we decided to have them call a credit repair company that a couple of our team members (our broker and our lender) recommended. We’ve gotten great feedback about this company, and have been told that if they can’t get these people’s credit to where it needs to be, nobody can. We told the buyers that if the credit repair company said they’d have a shot of qualifying for a mortgage within 6 months, we’d extend the contract for 6 months.
After a 3-way discussion between me, the buyers, and one of the senior folks at the credit repair company, I’m now fairly convinced that our buyers have a good shot at qualifying within 6 months if they continue to do all the right things. So, we wrote up an extension to the contract, we a couple stipulations around checking in with the credit company several times per month, getting a couple large bills paid off, etc. The contract has been extended through February 2010, and if they do all the right things between now and then, they have a reasonable chance of qualifying for their FHA mortgage.
And if they don’t do their part to try to qualify, I won’t feel bad taking the extra $3000 in option fees they’ll be paying between now and then…
Even though this is really reality, it is kind of like a reality show and I’m rooting for these people to fix their credit so they can get the house.
Any idea how a Credit repair company does their magic? What do they charge? What is their current FICO? I’m rooting for them as well and we will see where this lands.
Thanks for the update, J Scott. I’m rooting for them, too…..reminds me of the old adage “you can lead a horse to water, but you can’t make them drink it.” Hopefully they will “drink the water” so to speak.
Jingle –
Their three FICO scores (from the three companies) are: 482, 560, 568. While their FICO numbers aren’t that far from being high enough to qualify, they have a couple liens on their credit that would make it impossible to get an FHA mortgage (for example, back child-support payments). So, not only do they need to get their FICO scores up, but they need to strategically pay off a few key items on their report.
The credit repair company basically does three things:
1. They dispute every negative thing on the credit report with the credit agencies. The credit agencies are then required to verify the accuracy of every negative item within 30 days, and if they can’t verify something directly with the creditor, it must be removed from the credit report. The repair company will do this over and over, hoping the credit agencies will start to remove things;
2. They will negotiate down some of the old loans, and get the creditors to agree to take less money. In return, the buyers will agree to pay off these loans quickly.
3. They advise the buyers what they need to do to improve their score. For example, some of the stuff they owe money on are really important to pay off or they won’t ever qualify for a mortgage (like back child support) and some things are not important at all (like old JC Penny collections). So, the repair company will tell them what to pay off immediately and what not to. Also, they may advise opening a new credit line/credit card or closing down credit lines, as these things have substantial impacts on your credit.
For all this, the company we are having them use costs $50 to sign up, and $70 per month. We have agreed to pay the credit repair costs for the buyers out of their escrow funds.
JScott,
you never sugar coat things like this. That is why from your writing it really sounds like they are working hard to make this happen. I hope they follow through for the sake of both parties.
Let me start by saying that your website has some great information! I am here in the DC-MD area and have been flipping homes for the past 4 years. Would you mind sharing the Credit Repair company’s info? I have 2 Lease Purchase properties and stats show less than 50% of these tenant/buyers actually purchase.
Monique –
Here you go: http://www.veracitycredit.com/
Also sent you an email with additional details…