Financing On For Sale By Owner (FSBO) Sales Can Be Challenging
On one or two occasions, I have had someone ask about "rent to own" properties available for lease but it is just not something I have ever done or wanted to do. I suppose it's possible they may work out for some people, although there seem to be a number of pitfalls.
Until reading George's post, I was not aware of the limitatiom of how much the seller could credit the buyer toward the down payment. Of course, being able to contribute to closing costs provides a loophole, of sorts.
How about you? Have you ever been involved in structuring a rent to own scenario? Is it common in your area?
Yesterday I read Debbie Reynolds blog "Tale of Two Houses, Same Everything but One Big Difference" and re-blogged by Lenn Harley. This blog caught my attention because of a Borrower I am presently working with who wants to purchase the house he is living in. What I am experiencing with this Borrower is a perfect example of how Financing On For Sale By Owner (FSBO) Sales Can Be Challenging. This Borrower is not even under contract yet and issues are already occurring.
The issues started over a year ago when the Borrower and Seller structured a "Lease To Purchase Agreement", and did not contact a Lender to advise them on how funds could be used. Like most people, including Attorneys, they think the Seller can contribute whatever portion of the rent they choose for the Renter to use as a down payment. That is not the case, the Seller can only contribute the amount of the rent the Renter paid over and above the Market Rent for a comparable unit in the same area. Most of the time the "Lease To Purchase Agreement" is structured at the Market Rent for the area, therefore, no funds can be contributed by the Seller towards the Down Payment.
When the Borrower came to me I made him aware of the restrictions on what the Seller can contribute towards down payment, and suggested the funds the Seller was agreeing to contribute be applied to Closing Costs, since the same restrictions DO NOT apply. The Borrower and Seller agreed, but then the question of how to best use the Borrower's Security Deposit needed to be addressed.
I suggested the Seller return the Security Deposit at the Closing much like the Borrower's Earnest Money Deposit would be. Again the Borrower and Seller agreed, and it seemed like everything was on. However, structuring the Sales Contract was taking much longer than it should, because the Borrower and Seller continued to think they could structure it on their own.
They quickly found out they could not, so I suggested an Attorney in their area for the Borrower to use to put the Sales Contract together. The Borrower instead choose an Attorney he knew who, you guest it, did not know how to structure it either. After wasting another week the Borrower finally contact the Attorney I suggested.
I provided the Attorney with the wording the Underwriter would require in the Sales Contract pertaining to Closing Costs and use of the Security Deposit. The Attorney put the Sales Contract together, but now the Seller's Attorney is on vacation, and will not be able to review the Sales Contract for another week.
We are not even under contract yet, and both the Borrower and Seller are already getting frustrated. If a Realtor/Agent had been involved from the start the Sales Contract would have been put together at least two weeks ago, and we would be close to having Loan Commitment by now.
Once this loan goes into processing I expect the appraisal to be the next issue, since a CMA was not done on this property. If this property under appraisers, and I expect it will, this Borrower will regret he is not represented by a Realtor/Agent. But by then it will be to late, and the mistakes, and frustration will continue.
One thing I have made very clear to the Borrower, is I will not act as the Realtor. I will advise on issues pertaining to the financing, but will not cross the line into areas the Realtor/Agent does. The Borrower says he understands, but I don't think he does. By the time he understands he will be wishing he had followed our first suggestion, which was to be represented by a Realtor/Agent.
Financing On On For Sale By Owner (FSBO) Sales Can Be Challenging, as this transaction has already proved, and we are not even under contract yet!
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Info about the author:
George Souto NMLS# 65149 is a Loan Originator who can assist you with all your #FHA, #CHFA, and #Conventional #mortgage needs in Connecticut. George resides in Middlesex County which includes #Middletown, #Middlefield, #Durham, #Cromwell, #Portland, #Higganum, #Haddam, #East Haddam,# Chester, #Deep River, and #Essex. George can be contacted at (860) 573-1308 or gsouto@mccuemortgage.com
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