Lease Options and Seller Financing – How They May Work For You
Yes, it’s true, money is cheap these days and a home buyer with good credit can borrow at under 4% for a thirty year amortized loan. But the economic turmoil over the last five years has taken it’s toll on the credit ratings of many otherwise low risk buyers. They may have a short sale in their history, a foreclosure or even bankruptcy. Many of these buyers will have trouble getting conventional financing today. What are their options?
Well short of uncle Milton leaving them a pot or cash to inherit they are either shopping for lease options or seller financing.
Seller financing is an increasingly popular option today for both buyers as well as sellers. The typical seller for a self financed deal will ask 20 to 30% of his purchase price in cash and then take a note secured by a mortgage for the balance. They in effect, step into the roll normally held by the bank
Here are some reasons they will do this:
· The return they can get on the note normally is higher than they would get by putting the money into a bank.
· The offer to hold the note greatly broadens the number of potential buyers that can buy their home.
· The price they can achieve can be higher thnn if offered traditionally as a cash only deal.
· It may be possible to sell the note on the secondary market for cash.
Often the seller will ask for the note to “balloon” in three to five years – giving the buyer to improve his credit and financial condition and giving the seller a timeline that he can deal with.
Market America Realty has handled quite a few seller financed deals and can advise you on how to work with you’re a lawyer and even a mortgage servicing company to set one up.
The buyer has interest in buying a seller financed home for the following reasons:
· While the interest rate may be slightly higher, normally there are no points associated with getting the loan
· The time needed for credit approval is very short and can normally be accomplished in a few days,
· He will be able to buy a house that he normally would not be able to afford. The balloon period gives him a target time to imp-rove his financial conditions.
If you are interested in learning more about selling or buying a home with seller financing, please contact a Market America Realty sales professional.
The second option I would like to review is called the lease purchase option and it may just be the lease option that will enable a seller to attract a future buyer to their home and enable buyers to afford to buy in this economy.
There are three components to the lease option:
•1. The Option Agreement
•2. A Buy Sell Agreement
•3. The Lease.
In most situations the option agreement and the lease are executed (signed) by both parties, and the option agreement will refer to an attached buy/sell agreement and it’s agreed upon terms. The essence of this transaction is that the buyer agrees to buy an option to purchase the home at some future date at either an agreed upon price or an agreed upon formula to arrive at a price. This agreement is executed along with a lease for the property. I suggest you use an attorney experienced in lease options to work with you and your Market America Realty agent can suggest a few to consult with that we have had success with in the past.
Let’s look at an example:
Seller Bob is retiring and wants to move from Fort Myers and sell his waterfront home and move to a smaller, less expensive retirement home. Bob has two mortgages on his home totaling $600,000 that cost $7500 a month including PITI. (Principal, Insurance, Taxes, and Insurance) His home has been on the market for almost a year and was originally priced at over one million dollars. He is current on his payments, but his income is well below the $7500/month cost and he is eating away at his retirement nest egg every month he owns the house.
Buyer Ralph and his wife have a large home that has $200,000 more in debt that the house could reasonably be sold for. Ralph and his wife own their own business, have children and have good income. They have stopped making their mortgage payments. Their credit is bad but their income is strong and steady.
Ralph agreed to lease Bob’s house for $7500/month and pay $20,000 to buy an option to purchase the home in two years. $2000 of each monthly rental payment will be applied to the purchase price as will the option monies.
What do Bob and family get? First of all, they get to move into a house that fits their income for very little down payment. They now have locked in the price that they will have to pay in two years (Keep in mind this is an OPTION, if prices continue to plummet, they do not have to buy – it’s their OPTION).
Bob gets a tenant in his home that will treat the home as his own, he breaks even on his monthly payments – and gets some tax advantages as well at tax return time.
The option money, by the way, was split between the owner and the broker. When the home eventually sells the commission will be the same as per the listing agreement, less the commission paid from the option money to the broker at the inception of the lease. There was no lease commission.
I love a deal where all parties are happy. Bob was happy because he got out from under the drain of cash flow loss. Ralph and his wife are thrilled because they were able to negotiate a good price at today’s depressed market values, and lock in a home they love.
(This was an actual lease option we negotiated on behalf of our clients; some of the details were changed to protect privacy).
If you are thinking or buying or selling on a lease option, talk to us, we can help. Here are some caveats that you must keep in mind and have your attorney address in the agreements:
•· Potential default by the owner/lessor on the underlying mortgage.
•· Maintenance Items – who is responsible for what.
•· Amount or rent applied to Purchase Price – if any.
•· Remedies for default by Lessee.
•· Insurance and tax issues.
Gregg Fous Gfous@marketamericarealty.com 800-439-1580