Archive for July, 2007
Leasing to Own is a creative method of essentially writing a long term purchase contract on a home with two big differences. You can move into the home immediately, and you lease the home until the contract closes. Such ‘Lease to Own’ options tend to appeal to a few select groups:
1. First time homebuyers with low-credit, no down payment, or are in some way unable to afford/obtain a mortgage
2. Illegal aliens, persons seeking citizenship, or persons who need time to find a family member to cosign with them.
3. Investors who wish to gamble that a home will go up in value, but don’t want to risk too much if it does not.
4. The constantly evicted who otherwise cannot find places to rent. (Sellers sometimes get desperate to fill the property and as a result are not as thorough in background checking)
For most first time home buyers leasing-to-own is a BAD IDEA. Chances are that almost every lease to own property you find will be constructed to result in one of the following outcomes:
1. Buyer agrees to rent the house for more than it would normally rent for, with the understanding that a small amount per month will be applied to the purchase price should you purchase in a year or more.
2. Buyer spends all kinds of money fixing up the house, making repairs, and so on. Buyer generally believes he or she will own the house so they take better care of it than if they were just renting.
3. X year(s) pass, and it’s time for the buyer to buy the house. One of three things happens:
a) The property has decreased in value —–> so the buyer walks away, losing a few thousand dollars in what was paid to extra rent, plus all the repair costs, new carpet, custom blinds, paint, landscaping etc.
b) The property is worth less —–> buyer stupidly buys at originally negotiated price because of money already sunk into the home.
c) The property has increased in value —–> seller then tells buyer about the new, higher price. Buyer threatens to sue, seller laughs. Seller sells for higher price, either to buyer…or a new sucker.
Keep in mind that smart real estate investors use the lease-option scam to extract extra money out of their investment properties. If you own investment property, a carefully constructed rent-to-own option can make you several thousand dollars AND get you a good renter.
Leasing to own is usually a BAD idea for illegal aliens, and others who are currently unable to get a loan, but think they might be able to find someone to cosign or get the loan for them in a year or two.
Having someone else own your home is just asking for trouble. Also, since home loans can be such a complicated process, it is very difficult to predict accurately that you will be able to get a loan in time to purchase the home.
That said, if you find a deal (which investors often do) locking it in a long term lease to own contract could be a wise way of gambling. Should home fall in value, you can walk away relatively unscathed (vs actually owning it).
Doing so REQUIRES a good attorney to help you construct a bullet-proof contract so that you can actually purchase the property should it increase in value. You should also try to contract the option of subleasing, as you may not actually want to live in the home, and subleasing is an easy way to minimize loss, and possibly even break even. Sellers may resist this (for obvious reasons, as you could potentially sublease to a very destructive renter)
Always be creative when approaching a seller, as proposing a rent-to-own could be an excellent method of buying a property with minimal risk. For the reasons already listed above, a buyer should generally avoid properties already being marketed as lease-to-buys.
The short answer, is YES.
You should always keep in mind (and hopefully this site has reinforced this) that Real Estate agents do not always know the law. They are not licensed to practice law, or to give legal advice. Ask yourself who do they really represent in a real estate transaction considering they only get paid if the deal closes.
If you’re buying a home for several hundred thousand dollars or more, or are a novice to real estate transactions, or have never dealt with a contract before…then you should definitely use an attorney.
1. Builders will sometimes use non-standard forms and contracts. If you’ve decided to buy a home without an agent, you should be careful before signing ANYTHING.
Prior to purchasing you should sit down and look over all forms, including the general state-approved forms. Make sure you’re comfortable with the language and wording of it all. If you’re not, you should decide on an attorney, agent, or builder’s agent to help you through the process.
2. If you find a builder and decide to use the builder’s agent as both your buying agent and their selling agent, keep in mind that the agent will have primary fiduciary obligations to the seller. That means you as the buyer, will most likely not get the best deal.
3. Use an attorney to look over contracts. Whether you have an agent or not, you can get in serious trouble if you don’t carefully contract the builder to build exactly what you want by a specific date. No one wants their home’s construction to be delayed three years, or worse, never be finished. An agent is NOT a lawyer.
4. Agents get paid off commission. As a result, most agents will act in their own best interests and not yours. This can be a serious risk, as the agent may not bother even looking over contracts and could get you a bad to terrible deal in an effort to secure a quick and easy commission.
5. Coming to the transaction with no agent should give you better bargaining power, especially with a builder. The advertised price for the home should generally includes a potential commission for an agent. This means builders can and should lower the price if you’re able to work without an agent. They should not increase the list price if they find you’re using one however.
Good luck on the purchase. A good agent can save you thousands, but a bad one can leave you with an unfinished home!
The urban myth that one can just send a lender the keys to their home in order to escape any further obligation to the lender is entirely false. Sending the keys to the lender is the single most expensive and stupid thing you can possibly do when you find yourself with an asset worth less than you owe on it.
Why?
Because the lender is going to sell the asset (your home, car, boat etc) for less than you could have likely sold it for, then proceed to charge you an array of fees for having done so, as well as go after you for the balance of what is owed minus the paltry sum they were able to sell your property for.
You should instead try to sell the property on Craigslist, eBay, local classifieds, or via a discount/low commission broker or auction house. Yes you may be selling the item at a loss, but you’ll be far better off than you would have been after the lender hit you with repo fees, bad credit marks, and a possible lawsuit.
If you seriously value happiness, then this decision should be an easy one. Buy the smaller home inside of the city. Research has shown that people adapt to various sized living spaces (and after living in my 400 sq. foot studio in Los Angeles I can vouch for this). People never truly adapt to long commutes however. In fact, most people find themselves increasingly frustrated at the time their commute robs from them keeping them from being with their family or pursuing other leisures.
Getting the smaller home will buy you something the large suburban one cannot provide. More free time.