I saw a blog from a Realtor that wants to warn Sellers about us REIs.
There is a lot of good REI training in here.
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Home not selling? Beware of a selling option that may financially ruin you!
From Gary L White.
From his blog:
"It's about you and who will represent your interests best for you and your family. I have specialized training which has placed me in the top 1% nationally in real estate specific education designations earned. The designations I currently have are: GRI (Graduate of Real Estate Institue), CRS (Certified Real Estate Specialist), ePRO (Internet Marketing Certified), ABR, (Accredited Buyers Agent), RECS (Real Estate Cyber Space Certified) and passed the Michigan Brokers Exam in June 2006."
His forum comment about lease options:
"When homes take longer to sell than normal sellers start looking for any option to get their home sold. Especially if they have taken a job in another community leaving a vacant home behind with the mortgage payment, taxes and insurance still having to be paid every month, along with the new homes mortgage, taxes, insurance and upkeep.
Here is something that has caused more stress than relief for some sellers and buyers who were bargain hunting. The method of lease / option to purchase. If you plan of doing this your worry is not the brokerages fee that will be due because of a sale or lease option, your concern is not waiting for the option period to run out so the buyer converts the lease to a mortgage in his or her name....no none of these are your big worry. The concern is that if you write the lease / option wrong it could trigger the "due-on-sale" clause in your mortgage agreement! This means you could be forced to pay your entire outstanding mortgage in full! Now isn't that a kick in the pants when you were just trying to help yourself.
The best way is to consult an attorney when your are considering a lease/option sale. The attorney can write the contract and avoid the "due-on-sale" clause until the formal purchase is ready to be executed.
Beware of anyone asking for a lease/option with no money down. Especially when they say they will take over the mortgage, make the payments for you and you just sign here. "If it is to good to be true, it is!", that old saying hasn't lost any of it's charm...it is still accurate today. We have people trying to take advantage of other peoples situations when they are at their lowest. Thankfully there are many good Realtors but we also have investors and Realtors dressed in sheep's clothing. Your danger is that the party taking over your mortgage payment leases out your property never makes the mortgage payments, keeps the rent and your are on the hook for a foreclosure, ruining your credit. Always ask questions first. Ask if you can take a copy of the contract to your attorney or Realtor. If they give you all kinds or reasons they don't want this to happen, take a breath and re-look at what is being proposed. My guess is it will look different during the second look at the proposal. It is one thing to be high pressured, or strong armed but very few people will object to you consulting with a professional if everything is on the up and up.
Nothing sells a home faster than proper marketing and price. The more exposure your property has to buyers the faster you are going to get offers. Sounds to simple but knowing how to market, where to market and for what price is the trick. Good luck, hopefully I have just saved you some of your hard earned money by giving a word of caution.
Sincerely,
Gary L. White
Associate Broker, Five Star Real Estate
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My comment to Gary L. White:
As investors (REIs) ethics are important in Alternative Real Estate Puchasing Techniques.
I have listed below several techniques that Realtors - Sales Agents do not consider.
Advantages and Disadvantages of Sub2, Seller Held Mortgages, Lease Purchase (Sandwich) and Installment Sale-Agreement for Deed.
Sub2 -
Advantages Of Buying "Subject To"
Taking over property "Subject To" has several advantages that are especially nice if you are a beginner or have limited funds and/or limited credit. Mainly, you have the ability to own nice houses without having to come up with a large down payment or having to qualify for a loan, and the closing costs are minimal.
You also have multiple exit strategies.
For instance, you could keep the property for yourself as a rental, or you could fix it up and retail it. You can even pass the no qualifying deal onto your new buyer.
Disadvantages Of Buying "Subject To"
As for the disadvantages of buying "Subject To", as we said earlier, you always have the due-on-sale clause issue. However, as you go through this system, you'llleam more ways to get around this issue as well as limit your liability.
The due-on-sale clause also will limit your ability to resell the property without paying off the loan. This is because many homebuyers will be reluctant to invest money and move into a property when there is a chance that the bank may call the loan due, even if the chance is a slim one.
Seller Held Mortgage -
Advantages Of A Seller Held Mortgage
There are some obvious advantages when you can get a seller to hold back a mortgage.
Little Or No Money Required
First, many truly motivated sellers will not look for very much money down, if any. If the seller does want a lot of money down, then you're not dealing with the right type of seller and need to move on.
No Credit Required
You also don't need any credit to qualify for a seller held mortgage, unless the seller specifically ask to see your credit report. Even then, the seller is not scrutinizing you like a bank would.
Seller Financing Does Not Show On Your Credit
One advantage that can help you down the road is that seller held mortgages don't show on your credit report. This can be helpful when trying to get bank financing to buy other properties because your credit report does not show as much debt.
Disadvantages Of A Seller Held Mortgage
Trying to do deals by only getting a seller held mortgage, does have some disadvantages.
Finding Motivated Sellers Who Own Free And Clear
Probably the biggest disadvantage to buying properties using only a seller held mortgage, is that you must find properties in which the seller owns it free-and-clear of any loans or liens, and who is willing to collect their money in monthly installments.
Wrap Around Mortgages Violate The Due-On-Sale Clause
Also, as we said a minute ago, if the seller doesn't own their property free and clear, a wrap around will violate the due-on-sale clause on the underlying first lien. This is due to the fact that title to the property has transferred without the underlying loan getting paid off or assumed.
You can however, do a seller held second mortgage when getting a new first mortgage because you would be formally qualifying for the new loan. Or, you could qualify to assume the seller's loan and have the seller take back a second mortgage. Either of these scenarios would solve the due-on-sale clause problem. However, as you'll learn in this course, you don't need to qualify for loans or put your personal credit at risk to be able to invest in real estate.
Closing Costs
Another disadvantage with a seller held mortgage is that you'll have to pay some closing costs, because the title is transferred and a new mortgage or trust deed to the seller has to be recorded. There are also other attorney's fees and closing costs, if you want to make sure everything is done right.
If the seller isn't getting any money down, they may not want to come to closing with cash for their side of the closing costs. Therefore, you may even end up having to pay all of the costs just to get the seller to do the deal.
Seller Will Have To Foreclose
Finally, because this is seller financing in which the seller's interest is secured by either a mortgage or trust deed, the seller will have to foreclose in the event the buyer defaults on their payments. Because of this, you should never sell your property using a seller held mortgage or trust deed. There are other seller financing options you can use when selling your own properties that afford you more control and we'll cover them in more detail later.
Agreement For Deed -
Advantages Of An Agreement For Deed (Contract For Deed, Intallment Sale, Land Contract)
You Don't Have To Qualify
As for the advantages of using Agreement For Deeds when buying, it is basically a seller held mortgage except that you get title later. Because it is seller financing, you don't have to qualify like you would on a regular bank loan, nor would you have to put any money down if you found the right motivated seller.
Little Or No Money Required
In addition to possibly not having to put any money down, there are no up front closings costs. You'll be paying those costs later when you fulfill the terms of the agreement and take title.
You Can Refinance The Agreement
Also, most banks recognize an Agreement For Deed as being a seller financing agreement and will allow you to refinance as if you had a regular mortgage with the seller. Because of this, an Agreement For Deed can be a very helpful stepping-stone to getting a bank loan without having to come out of pocket for a down payment or closing costs.
Disadvantages Of An Agreement For Deed
An Agreement For Deed does come with some disadvantages.
The Due On Sale Clause
First of all, an Agreement For Deed does still violate most due-on-sale clauses even though most people may not realize it. However, many sellers are still willing to do them because they feel that a bank won't call a loan due if the title hasn't transferred and the payments on the loan are being made.
Seller May Have To Foreclose
If you are the seller under an Agreement For Deed, one of the disadvantages is that you almost always have to foreclose on the buyer in the event the buyer defaults. This is mainly due to the fact that an Agreement For Deed is considered an "installment sale", which is basically a mortgage. The seller also couldn't just evict the buyer as if they were a tenant.
As a buyer, you don't always want to counsel the seller on what would have to be done in the event you defaulted. After all, you as the buyer are supposed to follow through on the agreement and not default, so the seller might wonder why you would be disclosing this. Also, every seller can seek legal counsel if they wish. You will however want to let the seller know that an Agreement For Deed does give rise to the due-on-sale clause. At the same time, you'll want to explain to them that it is highly unlikely that any bank would call a loan due when the title hasn't transferred and the payments on the loan are being made.
If the seller is reluctant to do the deal because of the due-on-sale clause, then you'll want to offer them a Lease Option.
Lease Option - Lease Purchase
Advantages Of Lease Options
There are of course a lot of benefits to lease optioning properties.
That is why Lease Options are very popular among investors today.
As an investor there are three different positions you can be in.
* You can be the Seller (selling your own property),
* you can be the buyer (lease optioning from a home owner), or
* you can be the investor in a Sandwich Lease Option where you are sandwiched in between the owner and your tenantlbuyer.
Because there are advantages to being in each of these three positions, we'll take separate look at each of them. If you are simply a homebuyer, looking to buy a property with no down payment, you will be mainly interested in the advantages to the tenantlbuyer only. However, it is a good idea to know the advantages the seller gets so you can inform the seller of these advantages when negotiating.
Advantages To The Tenant/Buyer
The first set of advantages we're going to take a look at are the advantages to you as a homebuyer or to your tenantlbuyer if you are selling.
Sellers Don't Have To Be Very Motivated
One of the biggest advantages when Lease Optioning property, is that the sellers don't have to be very motivated. They just need to be a little flexible.
Quick To Execute the Paperwork
Lease Options are also very quick when it comes to getting you into the home. If the house is vacant you can actually start moving in the same day. This is due to the fact that you are leasing the property and there is no closing until you exercise your option.
Control With No Money Or Credit
You don't need credit or a lot of money to put down to do a Lease Option either. The most money you should be putting down is the first payment and even then, this first payment could be due and payable when the next mortgage payment is due on the underlying loan.
The buyer has the right to occupy the property and the seller does not have the right to sell the property to another buyer. This gives the buyer a lot of control not only over who lives in the property but whether or not the property can be sold.
Furthermore, the buyer is not obligated to buy and can walk away if they decide at the end of their lease term. A Lease Option only states that the tenant/buyer has the "option" of buying. It does not state that the buyer will buy or has to buy. This is different than an Agreement For Deed which states that the buyer "is buying".
Rent Credits
Depending on how the Lease Option is structured, the tenant/buyer could also build up equity while they are leasing. This is because a portion of the monthly lease payment can be credited towards the purchase of the property.
Refinancing A Lease Option
Another key benefit is that the tenant/buyer can refinance the Lease Option agreement as if it were a seller held mortgage. As we said earlier, many banks will even let the tenant/buyer get a refinance loan based on the actual value of the property and not on the purchase price (if the value is higher than what they are purchasing the property for). Most banks will also roll the closing costs into the loan.
Refinance loans are much easier to qualify for because chances are, the Lease Option payment the tenant/buyer has been making, is more than what their mortgage payment would be to a bank. This carries a lot of weight with the bank when the tenant/buyer can show they have the ability to pay consistently on time every month.
Future Discounting
As the tenant/buyer, the terms of your Lease Option may be very favorable.
Therefore, there may not be much to gain by refinancing. If the seller has money coming to them if you do refinance, you may be able to talk the seller into taking an even lower price in exchange for you refinancing sooner.
In fact, any time you can payoff someone you owe early, you should ask for a discount.
Advantages To The Seller
The next set of advantages we're going to take a look at are the advantages to the seller who actually owns the property. This may be yourself, selling your own property, or this may be the seller that you are buying from. In either case, it is important for you to know and understand these benefits.
More Potential Buyers
The biggest advantage to selling a property under a Lease Option is that you have more potential buyers.
When selling a house, you are looking for a qualified buyer. However, there are more people out there who cannot qualify for a mortgage loan than there are those who can. These people who cannot qualify for a loan do not have a lot of houses to choose from and are very interested in buying a home under a "Rent To Own" arrangement.
The right buyer is one who has the money needed to put down and the ability to repair their credit (or build the necessary credit), so that they can qualify for a bank loan. During the option period, the tenantlbuyer has time to repair or build their credit, save up for a down payment, and even make repairs to your property if needed.
Don't forget, the buyers that can qualify for a mortgage loan can still buy under a Lease Option and the more you limit how much a buyer has to come up with, the more buyers you will have as well.
No Title Transfer
You only deliver the deed when the agreement has been fulfilled. This has many benefits within itself, including easier remedies in the event of default and you can retain many of the tax benefits of still owning the property.
No Due On Sale Clause Violation
Again, as we said earlier, because the title has not transferred, a Lease Option does not give rise to the due-on-sale clause if structured properly.
Eviction Rather Than Foreclosure
Lease Options also give the seller more control in case of default by the tenantlbuyer than if the seller had given the buyer a seller held mortgage or Agreement For Deed. This is not only due to the fact that the title has not transferred yet, but also because a Lease Option creates a landlord-tenant relationship.
Under a Lease Option, you can evict the tenant whereas under an Agreement For Deed, most states require that you file a foreclosure, which is much more time consuming and costly. Evictions, on the average, take thirty to forty-five days depending on what part of the country you live in, whereas a foreclosure could take
up to six months or more.
It is important to remember that as a tenant/buyer, it is much easier to talk a seller into doing a Lease Option because of the fact that the seller can simply evict you in the event you don't follow through.
Judgments Against Buyer Will Not Attach To Property
Remember also, under a Lease Option, the title to the property is not in the name of the buyer, therefore if the buyer gets a judgment against them, the judgment will not attach to the property.
Tax Advantages
The seller also retains the tax benefits of owning the property. Because the property
is technically still just being leased, it is still a rental and can be depreciated on the owner's tax return. The seller can also write off their taxes and insurance on their mortgage.
And lastly, the option money a seller receives is tax deferred (IRS Section 1234 Option Consideration Taxation).
Advantages To The Investor - Sub-Lease Options
The last set of advantages we are going to take a look at are the advantages to the investors under a sandwich lease. As an investor who Lease Options a property from a seller, then sub-Lease Options to a tenant/buyer, you not only get both the advantages as a buyer and a seller, but you also have other advantages as being the investor in the middle of the sandwich Lease Option.
More Paydays
One of the best benefits of dealing in Lease Options is that you have the multiple paydays we talked about earlier.
When flipping property wholesale, you get one payday and it is usually in the amount of several thousand dollars or more. But, when dealing in Lease Options you have multiple paydays, some of which are dramatically larger than the payday you get when you just flip a property. It is great to do a deal once and get paid several times.
By using Lease Options, you can keep control of a property, have a monthly income, and later realize a profit when you sell it.
You also realize immediate cash from the tenant buyer's option fee.
Future Discounting
One important payday is when your tenant/buyer exercises their option and purchases the property. At that time, you'll be paying off the seller, and where are you going to get the cash to pay them off early? .. From your tenantlbuyer who is paying you off.
If the seller has any money corning to them, it is a perfect opportunity to ask the seller for a discount if you pay them off early. The important thing here about negotiating the discount with the seller, is not to let the seller know that your tenantlbuyer will be paying them off anyway.
By getting the seller to discount in exchange for the early payoff, only adds to your payday and creates additional income for you.
Deal In Nice Properties
Best of all, when doing Lease Options, you get to deal with nice houses, in nice areas, in beautiful condition, and you get to deal with quality buyers. These will be houses you would be willing to live in yourself.
Less Repair Work
Of course, because you're dealing in nicer properties, there will be less repair work. Even if the property does need work, you can reduce your repair work by having your tenantlbuyer do some of the minor things after you have repaired any major problems.
Avoid Seasoning Issues
There may corne a time in which you purchase a property outright and you decide you want to retail the property. By only owning a property for a short period of time before you try to resell it, you many times will run into what investors and mortgage brokers call a "seasoning" problem when the new buyer applies for a bank loan. The word "seasoning" simply means how long the title to the property has been in your name.
The problem is, many banks don't like to do loans on a property in which the seller recently purchased the property for a lower price and is now reselling the property a couple of months later for a higher price. While there is nothing wrong with buying a run down property at a good price, and then fixing it and selling it for full value, banks are not always comfortable knowing the property recently sold for a much lower price than you are selling it for now. This is because banks think that if they have to take the property back, the original lower sales price is an indication of what they mi.ght get on the foreclosure market. Banks also don't like to see investors making money at what they feel is their expense.
By doing a Lease Option, the extra time you own the property during the lease period allows you to overcome these "seasoning" issues with lenders.
Can Do A 1031 Tax Deferred Exchange
Lease Options also buy you more time so that you can still do a 1031 Tax Deferred Exchange if you own the property for eighteen months before the tenant/buyer exercises their option.
By Lease Optioning the property out for the necessary eighteen months, you can save yourself from paying any capital gains tax on the deal. Remember, a dollar saved is a dollar earned. If you bought the property, owned it for a few months, and then retailed it, you would not be able to do a 1031 Exchange.
You Have Multiple Exit Strategies
Another advantage to you as an investor is that when you Lease Option a property from a seller, there are a lot of things you can do with the deal.
* You can either keep the property as a rental and not give the tenant an option to buy, or
* you can Lease Option the property to a new tenant/buyer with a higher down payment, deposit, a higher monthly payment, and a higher sales price.
* You also have the option of performing any repairs needed and then retailing the property without sub-leasing it to a tenant.
* Or you can keep the home for the purpose of making it your residence without having to qualify for bank financing or having to put any money down.
* You can even combine strategies by purchasing a property "Subject To" and then reselling on a Lease Option to your tenantlbuyer.
Selling With Lease Options Vs. Renting Out Properties
If you like having the monthly cash flow that comes from owning a rental, but you don't want the hassle of repairs and dealing with tenants, you may want to consider Lease Optioning houses out rather than doing straight rentals or straight retailing.
By doing so, you are basically combining Rentals and Retailing (rehabbing and selling to consumers) into one.
By selling under a Lease Option, you as the landlord avoid much of the hassles you would have if you had just made the property a regular rental.
* You cut out a lot of the disadvantages of being a landlord while at the same time, keeping almost (if not all) of the advantages.
* Plus, Lease Optioning has its own advantages that you can't get as a landlord, such as a higher up front deposit that is nonrefundable.
* You can also get a higher monthly lease payment, and the tenant/buyer takes care of the maintenance.
This means that tenants won't call whenever they have a repair problem, the property appreciates, you get a cash flow, the tenants pay down your loan for you, and you get the tax benefits of depreciation. It just can't get much better than that!
Disadvantages Of Lease Options
We have covered a lot of advantages that corne with doing Lease Options. So, there are bound to be some disadvantages, yet there aren't very many.
No Ownership Yet
Of course, you don't yet own the property in your own name when buying under a Lease Option. This isn't much of a disadvantage because you do control the property. However, you don't get the tax advantages that corne with ownership.
Judgments Against Seller
Furthermore, because the title to the property is still in the seller's name, you do have a slim chance that the seller might get sued and a judgment could attach to the property. If you feel you have a seller that you should be concerned about, you can solve this problem by having the seller put the property into a land trust. We'll be covering land trusts in detail in Module 3 on the Agreements Section.
Tenant/Buyers That Default
As a seller under a Lease Option, you always have to consider that your tenant/buyer may not be able to qualify for a bank loan. The tenant/buyer may not improve their credit and even if they have somewhat good credit now, their credit situation may go down hill.
No mater what, you always have to plan for the tenant/buyer not being able to qualify, or if they walk away for one reason or another.
