So what happens with all of those "sub prime" buyers? They can't buy now if they have glitches and dings on their credit. They want to rent because they are not so far away from being able to buy that they may as well give up...and hey, there are all of those desperate sellers out there looking for a way not to make double house payments, hmmmm.
WHAT ABOUT A LEASE OPTION?
When the going gets tough, the tough get creative. I have done lease options in the past. They seem pretty simple and straight forward. I have even seen some closed, (miracle of miracles), but is there is a danger associated with lease options both on the side of the buyer and the seller.
We all understand that the risk for the seller is that the buyer may not close on the property, may do damage to the property and then the seller will have to take the property back in a year or two, possibly after dealing with a bad tenant or even an eviction and fix up the house for sale or rent again. Those risks are pretty straight forward.
Then there's the risk to the buyer. I had one situation this year where a buyer put down a large sum of money and then started making timely payments to the seller. After about 9 months, the buyer got a foreclosure notice on the door. The Seller had not been making the mortgage payments with the money that the buyer had paid him. Thank God, the Seller was able to scrape together the option money to refund to the buyer. (After being threatened with legal action and pressured by his own agent who happened to be a relative of his).
As with all creative transactions, you have to weight the pros and cons of a Lease Option:
Pros:
-Sellers can make payments on stagnant market properties by filling them with Option tenants. Weather the transaction closes or not, they have had financial help waiting through the market down turn.
-Buyers can obtain property at today's prices and work on their credit or qualifying issues, then close in a year or two when their situation has improved.
-Offering a property with Lease/Option terms gives you an advantage in the slow market by opening up to former sub prime buyers.
-Improvements may be made to the property so that when you go to re-sell, (in the event the lease/option transaction falls through), you have a nicer product to sell.
-75% of your rental income can be used to qualify for other property purchase and refinance loans.
-Helps buyers to have a tangible goal to work toward in repairing credit or qualifying issues.
-Helps Sellers to get "top dollar" in a market where they may have to lower price to sell. (my price...your terms).
-No surprises on inspection issues. That must all be worked out before move in.
Cons:
-Possibility that the buyer won't close and the property will be damaged or devalued by "improvements".
-If the Seller is optioning the property because of a financial distress situation, the seller's situation may only worsen and cause the buyer risk in their investment.
-Seller may not obtain as much liquid cash as needed through charging only the Option deposit and rent.
-If the property continues to go down in value, the appraisal condition to the contract may force the seller to either refund some of the buyer's money at closing time or sell the property at a lower price.
-The buyer and seller may develop a relationship during the option time and find that the buyer cannot purchase. That may make it difficult for the seller to execute the contractual agreement at term.
Of course, there are many more risks and benefits associated with such a broad transaction and sound legal advice should be obtained, however, in a tough market like the one we are facing, Lease Options may become more popular than ever.
In some cases, you will see investors who are priced out of the sub prime market doing lease options to flip.
Let the fearful go home and let the creativity that this market affords help us thrive! No pain, no gain. Creative financing options may be the new wave...
Comments(5)