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Leasing to purchase a home is called many things these days. If one searches Realtor.com they may see terms like “owner will consider financing" or “rent to own." Still, some of old-fashion minds still call this type of purchase a land contract. Essentially, in most states, how they work is the same.
A homeowner looking to sell may choose to skip the realtor commissions and enter into an agreement with a wannabe home seeker where the seller sets a price, plus interest for a set period of time, usually three to five years and at the end of the term, the buyer must obtain a conventional mortgage to pay off the balloon balance of the loan. Most sellers will require a down payment commitment as well.
The idea is by the time of the balloon, the buyer has reestablished their credit enough to obtain a conventional loan.
Not only is the premise a good one, both the seller and buyer benefit from avoiding commission payments to realtors—something agents may not like, but renting to purchase is, in my opinion a very good idea even if your credit is excellent. In fact, my husband and I have purchased two homes this way and two industrial buildings—all without paying a cent to a real estate agent.
Before realtors everywhere hate me, some experts say the entire process is a bad idea and one to be avoided.
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Melinda Fulmer of MSN Real Estate spoke to a few experts. Doug Malan, a Las Vegas Nevada lawyer warns, “It (the process) can be a nightmare on both sides, especially if one party doesn’t fulfill its end of the bargain." Malan has a point here. If the buyer doesn’t make timely payments, there are usually provisions allowing the seller to retake the home and the buyer loses everything including their down payment.
Joe Manausa, broker and owner of Century 21 First Realty in Tallahassee warns, “Buyers can pay, only to find that the owner has stopped making his mortgage payments during the lease term." In cases such as this, the original lender may foreclose on the home leaving the buyer out on the street.
These nightmares do happen when parties enter into owner financing, however, if one does it right, I truly believe the naysayers are really the ones missing out on commissions so for them, it’s easier to spout out reasons to avoid these transactions. The truth is folks, you don’t need a real estate agent at all if you feel renting to own is right for you.
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Where to Find Homes
First off, skip searching Craigslist for these types of opportunities. Most owner financed homes listed there are really ads by real estate agents representing the owner and while you may be able to lease to purchase from these ads, there are still commissions to be paid.
Instead, search websites such as For Sale By Owner, or look at real estate classified ads in your local newspaper. You can even find many of these types of homes by driving around desired neighborhoods. Once you find homes you’re interested in, call the owner—but if you get a real estate agent instead—hang up.
You want to find a genuine homeowner willing to complete the process without the real estate agent, and agents are tricky via advertisements. A good sign is an advertisement that offers “no calls from brokers please."
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If you’re a buyer choosing this option, a simple Google search on “sample or free lease to purchase contracts" will find you various types of contracts you can compare to the one offered by the seller. The best contracts provide the agreed upon sales price, interest rate, down payment and term the balloon (conventional mortgage) is due. The very best of the lease to purchase or land contracts will use an escrow company where monthly principal and interest payments are made.
Making your monthly principal and interest payments into an escrow account allows you to claim interest paid as a deduction on your taxes, much like a conventional loan. If the contract doesn’t allow for this, ask the owner to consider the option of using an escrow company.
Most sellers will want the buyers to pay the property taxes, although there are a few willing to pay them during the lease to purchase term. If the seller wants you to pay the taxes, make sure they offer up the amount due and a written statement from the county saying all taxes are current.
Once buyer and seller agree to the contract terms, there are a few other things to do before you sign on the dotted line.
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Make sure you take care of the following:
Warranty Deed – Ask the seller to offer up a warranty deed (an example can be found in the reference section). This document must be recorded at your county clerk’s office and protects your interest in the home during the term of the seller financing.
Survey – If the seller doesn’t have a current survey (less than three years old), ask them to pay for a new survey or agree to split the cost. You can find many surveyors in your local telephone book—compare prices to achieve the best one.
Title Search – This is a must before you sign the land contract or lease to purchase agreement. Ask a title company to perform a title search on the property to ensure there are no encumbrances or liens on the property the seller may not have disclosed. If there are, you may need to skip the purchase.
Title Insurance – Again a title company can provide title insurance stating the property is free and clear of liens once the title search has been performed. Both the title search and insurance policy costs can be split between seller and buyer.
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Don't Forget the Balloon Payment
If you do decide owner financing is right for you and complete the steps above, as soon as you move into your new home, keep the balloon payment due date in mind. If you have great credit, you may want to obtain conventional financing immediately for a lower interest rate. If you need a little time to repair your credit, do so but still try and obtain a conventional loan well before the balloon due date. This is essential because if you find you don’t qualify for a conventional loan and can’t make the balloon payment, you may lose all you’ve put into the home. Another option to consider is to include the option for an extension on the balloon payment by the seller in the event a conventional loan is unavailable. Keep in mind, most sellers will only extend the term two years—so repair that credit score!
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Today's Real Estate Market
Many homeowners are finding themselves near foreclosure and are more willing to offer owner financing—but if you’ve never completed this type of transaction before, have an accountant or attorney review the documents. If you’re really lost, you may want to use the services of a real estate agent (although they can be expensive) to protect yourself.
Today’s real estate market is different and both sellers and buyers are smarter. Don’t blame the real estate agent for trying to get involved, they too need to make a living, but you can do this on your own, without their help or fees.
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Some states such as Texas disallow owner financing. This doesn’t mean a buyer can’t obtain owner financing, however. What it does mean is homes sold in this manner must go through an investor or investment group and that means paying commissions to someone. Before you seek out owner financing, call your state’s real estate board and have someone explain the owner financing process in your state.
Make sure you read all agreements and contracts in full and if the seller agrees to anything such as repairs, make sure all items are contained within the agreement along with remedies available to you if the seller fails to complete any items.
Because I've been through owner financing in many transactions, it seems to me the naysayers are real estate agents and attorneys. Why? Too many home seekers fear the words "owner financing" and hire real estate attorneys or seek out the advice of real estate agents, and those people, don't work for free.
You can skip this paid advice, but I'm wondering how many of you out there are paying high fees when you could have completed the transaction on your own? Or, how many of you have tried owner financing only to find out behind the owner stands a greedy real estate agent with their hands out and an attorney "friend" waiting to take a peek at contracts before you sign them?
Lastly, many owner financed homes are a broker transaction. How can you tell? If the home stips come with homeowners association fees (HOA) or are part of an unfinished development, this means the builder or owner of these homes dropped out for some reason or another, so there are the hidden wrap around loan fees to deal with.
It would be interesting to hear how many of you have started the process of owner financing, only to get burned? Leave a comment and yep, you can remain anonymous!
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Fulmer, Melinda - MSN Real Estate – “Rent to Own: A Good Solution for a Troubled Housing Market?" retrieved at http://realestate.msn.com/article.aspx?cp-documentid=27845256
For Sale By Owner Website - http://www.forsalebyowner.com/
Helpful Form Examples:
Total Real Estate Solutions – Lease to Purchase Example Form - http://www.totalrealestatesolutions.com/realestateforms/html/BuyerLeaseOption.html
Mortgage Investments - Sample Warranty Deed - http://www.mortgage-investments.com/Real_estate_and_mortgage_Forms/formpage/3_Warranty_Deed.htm
The author has purchased homes and buildings via owner financing but does warn those new to the process should seek help. The forms provided here should be used only for informational purposes and are owned by the respective websites above.
Question Sign - Sxc.hu/ba1969
Going Green House - Sxc.hu/lileavell