With the markets getting
tighter due to so many foreclosures and bankruptcies, lease option has become
an easier way to purchase your first home. Lease option or sometimes referred
to as "Rent-to-own" is a simplified measure where the seller allows
you to rent the home and pay a portion of the money towards the down payment.
There are many types of lease
options and many types that should never be entered into. Many buyers have lost
their initial "option fee" by not protecting their self completely.
As a former Broker and owner of a Real Estate Firm, I handled many of these
transactions and I will try and protect you from making any mistakes.
Basics of a Lease Option:
The ideal of a lease option
is an option (agreement to purchase in the future) that the buyer may or may
not exercise. They will rent the home for an agreed upon price, plus an amount
of money for the down payment. The seller will deduct the down payment from the
price of the home each month. The buyer needs to keep very good records with
full receipts for the bank, when they do finance.
An example of a property I
handled, was a selling price of $143,000 with an option fee of $5000. The
buyers had to pay $1200 each month and $600 went towards the down payment. They
were given 5 years to exercise their option.
Problems with a Lease Option:
Due to falling house prices,
will the home appraise for the agreed upon sales price? In many times, the home
sold under a lease option is sold at a very high price. I might say that the
price is higher than normal. The buyer in many cases will agree to this as they
cannot qualify for the house on their own. If the buyer is not protected, he
could loose his option money and be forced to vacate the property.
If for any reason the buyer
does not maintain the monthly agreed upon amount of money, he could forfeit his
option money and be forced to vacate the property. Trying to save some money,
many buyers and sellers will opt not to go to escrow or hire an agent to
negotiate the deal and this could be a huge mistake.
How to purchase a home with a
lease option and protect your investment:
1. Always have the property
appraised.
2. Always hire a Realtor or a
lawyer to represent you.
3. Go through escrow and set
up a savings account where the monthly money is deposited in an account. Let
the escrow company pay the mortgage payment and then give the remainder to the
seller. This protects the buyer and allows them to see that the mortgage
payment is being met. Never pay the seller directly, as you cannot be assured
where the money is going.
4. Have escrow draw up proper
papers with all the said terms of the option. Document in the agreement that
the seller may not refinance the property or place any liens against the
property.
5. Place a contingency in
escrow that the property must appraise at the time of financing or the seller
must agree to reduce the price. Should the seller refuse to reduce the price,
then all option money and down payment must be returned to the buyers.
6. Require a title policy,
showing exactly how many liens are currently on the property and who is the
proper owners. Make sure that the person signing the papers are the legitimate
owners.
7. Pay all the money to
escrow in the form of a cashier's check. This is documentation for the bank
later when you finance the property.
8. All money deposited into
the arranged bank account should be paid in the form of checks or the buyer
should receive a receipt from the bank.
9. Get a second opinion as to
the value of the property. Such as comps from a title company or a few market
analysis from a competitive Realtor.
10. Do not make very many
upgrades to the property until you are sure that you will indeed buy the
property.
A lease option is just that. You
have the option to purchase the property or not. It is a good way to see what
kind of condition the property is in. In a normal lease option, the buyer is
responsible for all repairs. A lease option can be a very good way for the
first time buyer to purchase a home and have their money going towards
something tangible in life. Considering the money spent on rent could be the
same thing as interest, so nothing is really lost on that part.
If the buyer is careful with
his investment, opens an escrow account and has the property appraised, the
transaction can go very smoothly. A typical escrow may close in as little as
one week and then the buyer can move into their new home. It can be a win-win
situation for both the buyer and the seller.
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