Lease option to buy

How a lease option could benefit both buyers and sellers.
Ken Go (888) 822-5363

It would appear the market is changing, these changes will require both seller and buyer to adapt. The seller must realize that there will be more competition in the marketplace as more homes hit gets listed “For Sale”. Price will start to play a bigger role than the condition and location. Expect to see more listing prices being reduced and expired. Buyers have to realize they are not going to “steal” any homes as far as pricing goes. At least not yet, because now the buyers are still out there looking but taking their time and they have more choices.

The idea came to me when I have a caller who asks for my advice to see if I could lower his payments by refinancing his property. Here is their situation, they purchase a property less than a year ago with no money down, and got a two (2) years fixed rate mortgage that they could not afford from the start. Their loan agent promised them that they could refinance and get their payments down within a year. Two things happened here when that loan agent said that statements, one is either that person is so smart that he or she could predict what will happen to interest rates and home values within a year or that person is flat out just saying that to close this loan. You figure it out, on top of all this the loan carries a prepayment penalty for both loan.

Anyways, I calculated his options and checked the property value. I am hitting a brick wall, cant do any better on his payments due to interest rate now are higher. The property value has not risen enough to make a 90% combined loan to value due to the prepayment penalty to be added to the loan balance.

I then remembered that I have a client who is currently working on getting their credit cleaned up and in the process of saving up money for closing cost. T hey makes over $9000.00 a month and can afford$3000.00 payments. I heard a light bulb lit up in my mind and thought that maybe somehow I could put both of them together and make it work for both.

I am suggesting to the owner of the property to sell because even if I can help him with refinancing, in six months time he would be back in my office asking me to do the same for him and now he would live mortgage to mortgage sacrificing just to be above water. I then called the callers who are currently trying to save money and work on improving their credit and see if they might be interested in a lease option to buy. How this works is, they would take over the existing payments of the seller without going thru an escrow; a lease contract is signed thru an agent for a minimal fee paid by either the buyers or sellers. Without having to apply for a new loan, once agreed the buyers can move in and continue making payments for the sellers until a given time on the contract. Then should the buyers apply for a new loan to release the sellers from the mortgage responsibility.


Facts about lease options for sellers:
1. The seller might be able to avoid paying a prepayment penalty if the contract due to be exercised after the prepayment period.
2. The seller depending on the contract might walk away with some money.
3. The seller needs to monitor the payment of the buyers because the loan is still under the sellers name until the buyer refinances the loan.
4. The seller minimizes commission and closing cost paid to agents and escrow companies.

Facts about lease options for buyers:
1. The buyers will be able to avoid having to qualify for a loan regardless of credit situation, because they might just need to take over the existing loan of the seller.
2. The buyers will be able to avoid paying high fees for closing cost.
3. The buyers must be able to afford the payments of the mortgage, tax and insurance to be proven to the seller to avoid delayed payment on the mortgage loan.
4. If the buyers have poor credit but can afford the mortgage payments, they would have the time to re-establish their credit prior to applying for a loan in the future to fully own the house outright.


As easy as it sounds, this might be a harder task than meets the eye. The match has to be perfectly beneficial for both parties. A lot of communication would have to be going on even after the contract has been exercised.

Warning: Be careful with applicants just wanting to take over your payments and move in. They could move in sign a contract with you, but never pay the lender and you will be responsible as far as the lender is concerned because they never took out a loan under their name. If they did, it would not be called a lease but a regular conventional transaction.

Advise: Employ a professional to handle and negotiate the transactions and ask for some kind of good faith deposit to show interest from the buyers. Remember, they should be releasing the sellers from the payments only but not the responsibility.

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June housing construction rises more than expected

WASHINGTON (AP) -- Construction of new U.S. homes rose in June to the highest level in seven months as builders rushed to pour foundations for homes that must be completed by the end of November for first-time buyers to take advantage of a special tax break.

The Commerce Department said Friday that construction of new homes and apartments jumped 3.6 percent last month to a seasonally adjusted annual rate of 582,000 units, from an upwardly revised rate of 562,000 in May.

It was better than the 530,000-unit pace economists expected, and was the second straight monthly increase after April's record low of 479,000 units.

"This was the most positive housing report in ages," wrote Patrick Newport, an economist with IHS Global Insight.

Homebuyers are being attracted by lower prices, and first-time buyers can also take advantage of a tax credit worth 10 percent of the purchase price, with a cap of $8,000, which was included in the federal stimulus package.

"The largest spark...has been the looming deadline," said David Crowe, chief economist for the National Association of Home Builders. His trade group said Thursday that the confidence level of builders has risen to the highest level in nearly a year.

Shares of major homebuilders rose on the news with Beazer Homes and Hovnanian Enterprises up about 5 percent in midday trading. The broader stock indexes, meanwhile, were little-changed Friday after Bank of America and Citigroup became the latest banks to report big second-quarter profits but also weakness in their loan portfolios.

Over the past three years, the collapse in the housing market led to soaring loan losses, a severe banking system crisis and the longest recession since World War II. Even with the better-than-expected figures, the pace was still 46 percent below last year, and analysts don't expect a quick rebound. That's because companies are still shedding jobs and home prices are falling.

"There's still a long way to go before one wants to declare anything that begins to look like a strong recovery or success," said Rebecca Blank, undersecretary of commerce for economic affairs.

The Federal Reserve this week projected that the national unemployment rate, currently at a 26-year high of 9.5 percent, will pass 10 percent by the end of the year. Unemployment has already passed that mark in 15 states and the District of Columbia last month, according to federal data released Friday.

The rate in Michigan surpassed 15 percent, the first time any state has hit that level since 1984.

Most Fed policymakers said it could take five or six years for the economy and the labor market to get back on a path of long-term health. To get there, consumers must return to a regular spending groove and housing prices need to start rising again.

The jump in housing starts last month reflected a more than 14 percent rise in construction of single-family homes, the largest monthly increase since December 2004. Construction of multifamily units -- a particularly volatile part of the market -- fell nearly 26 percent from a month earlier.

Meanwhile, applications for building permits, seen as a good indicator of future activity, rose almost 9 percent in June.

AP Economics Writer Jeannine Aversa contributed to this report.

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