Alternative Options: Lease/Purchases, Foreclosures and Seller Financing

Share

('’)

by Mark Vanderhoff
on Tuesday, December 09, 2008

Two big topics color so much of the real estate business these days: falling prices and the credit crunch. These trends have created opportunities for some, and hardships for others. As a result, Asheville has seen some new trends in home purchases and creative financing, from foreclosures to lease/purchases to seller financing.

Before jumping into these waters in search of a deal; beware of the dangers of these alternative options. Their increase in popularity has also given rise to a bunch of new problems.

Foreclosures

It's the dream deal everyone is looking for: a large, nice house sold for a fraction of its value. For a while, foreclosures were The Big Secret, with countless books and infomercials touting their wonders. There are only two problems:

1. Foreclosures are not a secret anymore, and
2. Purchasing them comes with huge risks.

These days, one can rest assured they won't be the only person bidding on the courthouse steps. In fact, many in the crowd do this for a living, and they have large cash reserves, as well as teams of carpenters and repairmen, waiting to swoop in and fix the places up. That's the competition. Adding risk is the inability of the bidders to know much about what they're buying - unlike in a traditional sale, buyers can't inspect the home prior to purchasing. And forget about asking the bank to do repairs. The upshot: If you can stomach a lot of risk and have a lot of cash on hand, there are still great opportunities.

Other foreclosure-related opportunities carry less risk. Prior to foreclosure, many homeowners attempt a "short sale," in which they put the house on the market for a discount with the bank's permission. The bank realizes they won't get all their money, but it beats foreclosing and receiving even less in an auction. After foreclosure, if a property isn't sold at auction, it becomes a "Real Estate Owned," or REO, property, and goes back on the market through a real estate agency, usually at a discounted price.

Both of these options allow potential buyers to inspect the property prior to making an offer, hugely decreasing the risk associated with foreclosures. Of course, the sales are "as is," with the bank making no representations and doing no repairs. A real estate agent should be able to identify these types of properties for clients. One last caveat: Be ready to wait up to six months to close on the property; banks have notoriously slow bureaucracies that function at their slowest on short sales and REOs.

Lease/Purchases

Leases with the option to purchase, or lease/purchases, have become especially popular in Asheville in the past year. Because the cost of housing far outpaces the median income, many residents have a difficult time finding traditional financing. At the same time, a large number of investors and homeowners are stuck with properties they can't sell for the price they want at the moment. Enter the lease/option.

Under this legal arrangement, a buyer agrees to lease a home for a set period of time, and buys or negotiates the right to purchase the home when that period elapses. In exchange, the owner agrees to apply a certain percentage of the rent toward the purchase price of the home, and promises to give the tenants an opportunity to purchase the home before anyone else. Ideally, the tenants work hard to save for a down payment, repair their credit and work their way up the career ladder during the tenancy so they can one day buy that home. And the owner can rest assured that he's found a buyer.

Several glitches can sour this otherwise ideal arrangement. In Buncombe County, one family who entered into a lease/purchase agreement answered the door one day to find a sheriff telling them they had to leave. Unbeknownst to the tenants, the home had been foreclosed upon, and their stake in the home was lost. On the other end, homeowners are discovering the "joys" of being a landlord: late payments, property destruction and sudden, unannounced vacancies.

If you do enter into a lease with an option to purchase, hire an attorney to draft the contract. Do not rely on a real estate agent to draft one for you.

Seller Financing

Like the lease option, seller financing has arisen from buyers' need for credit and sellers' desire to pull cash from their real estate. For the seller who has the means to finance a purchase, this can be an attractive bonus when marketing a home. For the buyer with bad credit, no down payment and low income, this can be a decent alternative to conventional financing.

As with lease/purchases, both parties should hire their own attorneys to protect their interests. Real estate agents should facilitate the purchase, but special contracts will have to be drawn up by attorneys to address the terms of financing.

Buyers will want to make sure they have protections in place to prevent the seller from foreclosing on them immediately in the event of a missed payment. They will also want full title to the property, meaning that they have the right to possess and use the land and buildings as they see fit. There should also be contingencies that allow the buyers to pay off the loan early and to retain any profits should they sell the property. Depending on their plans, they may even want the right to sublet the property.

Sellers, on the other hand, will want to protect their interests by preserving the condition of the land, should they need to foreclose, and spelling out the terms of foreclosure, should the buyers default on payments.

Comments

JustinB - Sunday, January 25, 2009 @ 4:07:10 pm

Mark, I am curious about that the main risks are in seller financing for the buyer? Thanks.

Post A Comment

About the Author - Mark Vanderhoff

Contact Mark Vanderhoff:
Keller Williams Realty
828-335-3794
markv@kw.com
markv.yourkwagent.com

Learn more about Mark.