This is a primer (not intended legal advice, just my astute market observations as a real estate licensee in the state of Nevada) for anyone who is looking to Purchase or Sell using one of these types of financing. This post was prompted by Jeff Turner's most excellent post in response to a FSBO. This is a MUST READ.
- Owner Will Carry: Commonly referred to as "OWC". This means the seller will hold the note. Buyer usually must come up with a 10-20% down payment. Interest rates are usually higher than normal mortgages, depending on usury laws in your state.
- Lease Option to Purchase: Commonly referred to as "Lease Option". This means that the house is currently being rented out with an option to purchase at the end of the term. Terms can be flexible. Option deposits range generally from 3-5%. Option deposits are generally: a)forfeited at the end of the option term if the option to purchase isn't exercised or b)applied towards closing costs or down payment if purchase option is exercised. This MUST be written in the contract!!! Monthly rental rates are generally higher than market rates and sometimes a portion of that rent gets applied towards down payment or closing costs.
- OWC: Base the down payment and interest rate (per your state's usury laws) on credit. SEEK THE ADVICE OF AN ATTORNEY and have the attorney write the note. As a Realtor, I would NEVER write a note myself or use a canned form you buy at a local office store! Treat this type of purchase as a souped up lease option. You also run the risk when changing title of new liens being added to the property. Make sure property use is clearly defined.
- Lease Option: Make sure the option period is short and cannot be reassigned. Make sure price is clear. Make sure what happens to the lease option deposit is CLEARLY DEFINED in the contract. These should be treated like a LEASE and like a PURCHASE. There should be a leasing contract and there should be a purchase contract.
Thoughts and reflections on both of these financing types:
If you don't know what you are doing you will be preyed on by what I call "the unrentable". The "unrentable" usually have extremely poor credit and are living on (what I call) Noah's Ark. Noah's Ark means they have a plethora of animals and more than likely one or more of them are on "banned breed" insurance lists. Your insurance could be dropped and your home may become uninsurable on the C.L.U.E. report if your insurance company has banned an animal breed and they find out. Generally if these types of people were to do a normal lease or rental home, they would be required to double or triple their security deposits and their monthly rent could skyrocket. So their thoughts are "why not a lease option or OWC." They pretty much have to come up with the same $$$.
These types of transactions can be done with success. You just need the correct purchasers. The real reason behind a lease option would be someone who is speculating and doesn't want to risk in a declining market or they are new to the area and just want to test drive.
Lastly, make sure you DO NOT HAVE A MORTGAGE ACCELERATION CLAUSE in your note. Most lenders do NOT lend to allow this type of financing and you could possibly have your mortgage accelerated if they find out you are doing this!
- Get a lawyer and protect yourself from scams! I was bumping around on a major auction site (starts with an e) last week and was AMAZED at the amount of scams out there. I even checked title on some of them and what I found was atrocious!
- Escrow the funds that are held as down payments and lease option deposits. Many homes in the Las Vegas area are getting foreclosed on and I would say a majority of people getting foreclosed on are renters. The best way to protect your deposits and down payments would be to have a licensed and bonded escrow company HOLD those funds and even make the monthly payments in regards to anyone who can put a lien and foreclose on the property. (Mortgages, HOAs, Taxes, Liens, Sewer, Garbage, etc etc etc)
Now if you still haven't read Jeff's posting, go read it now and I will wait. tap, tap, tap, tap.
You are back, great! I am simply amazed by how many people called replied with advice that this person needs a Realtor. You can do this type of transaction WITHOUT a Realtor, and rather easily if you understand and do your due diligence (either buyer or seller!) What you do need to do one of these transactions is AN ATTORNEY who SPECIALIZES in these types of transactions. There are scams on both sides, folks! When I do these types of transactions an attorney is a MUST once I procure the buyer for a seller or vice versa.
It is easy to procure a potential buyer for ANY of these types of financing. What isn't easy is qualifying and making sure they are doing it for the right reasons!