The Concept of Rent to Own: LEASE OPTIONS

Today, I thought of writing on lease options, the concept of renting to own. A close friend of mine asked me about this potential pathway to home ownership, and after giving it some thought, I started to wonder if there are “real” deals out there right now where a seller can rent out a property and offer an option to the tenant to buy it, after a set number of months. Renting to own looks enticing, especially to those who can’t qualify for a home loan just yet; with tightening financing guidelines, the idea of renting for two years can buy a potential buyer some time until his/her finances are in place.

What are the features of a lease option? Here are some of them:

• The lease option contract, to be enforceable, must first be in writing
• The contract price for the property is set at the beginning, thereby, locking the price at the time of signing. Two contracts involved, the lease option contract and the Residential Purchase Agreement ( C.A.R- California Association of Realtors’ publication)
• The lease option contract determines the rental amount, the duration of the rental period, and the time when the option to purchase the property should be exercised by the tenant/buyer. These contractual elements are always negotiable between the two parties
• Buyer/tenant pays the landlord/seller an option money, much more like a security deposit, for the right to later purchase the property. This option money is usually non-refundable, whether the tenant/buyer exercises his right to purchase the property later, or not at all. This could be refundable, though, if specified under the terms of the contract.
• The rental money paid monthly does not form part of the purchase price, but if agreed by both parties, can be applied to the total amount negotiated.

So, if you are the landlord/seller, what’s in it for you?

Giving out a lease option will definitely attract not only your average renter, but, a serious buyer who is saving up money and getting his/her FICO scores into the 700 range so that he could obtain the best mortgage rate. Any tenant under a lease option will mostly stay because if they walk out, the option money walks away from them, too. These tenants will surely take care of your property since they have a vision of owning it anyway. Maintenance and vacancy issues are kept to a minimum, that’s for sure. Should the tenant/buyer decide not to exercise the option after the lease term expires, you keep the option money and move on to the next buyer/tenant. Lease options are actually one of the most used investing strategies employed by seasoned investors owning multiple properties.

If you are the tenant/buyer, what’s in it for you?

Under a lease option, no one but you has the right to purchase the property, after your lease term expires. You will be motivated to keep your finances intact because if you don’t exercise the option, you will just throw your option money away. Following the years after signing a lease option contract, you will be more responsible financially speaking, because of a future potential loss of money.

This market maybe tough for any ‘ regular’ seller to move his/her property given the number of short sales and bank owned properties out there right now. In the same way, strict financing guidelines are discouraging first time homebuyers from pursuing home ownership. The meeting of a motivated seller and a potential buyer on a piece of contract called lease option might just as well be the answer.

To answer the question I posed earlier if there are real, legitimate lease option deals out there right now in these challenging times, yes, there should be good ones, no matter how few.

Short Sale Fraud on the Rise: BEWARE!

Just a few days ago, a client whom I have represented in 2006 for the purchase of a property in Eagle Rock, called me and said that a ‘ real estate’ agent knocked on her door on a weekend and offered listing services. The agent said she knows my client was under water and that there was a Notice of Default filed against the property already. True enough, my client has not been able to pay her mortgage payments for the past 8 months due to her husband’s loss of employment. She is a nurse, yes, she is paid well, but without another mortgage helper, a monthly mortgage of $4,300 is not something she can sustain forever. So, she let the agent in and decided to give the presentation a try.

Apparently, what the agent has proposed is to let her list the property in the market as a short sale, along with a promise that she and the family can continue living in it as renters, because her investor client will put forward an offer to purchase the property and that they will negotiate for the approval of the short sale. My client cannot believe her luck! Could this be for real? For days on end, she has been sleepless thinking about her family’s housing predicament. “ How do I get approved for a rental if my credit history is screwed? Where do I seek help?” Should I just walk away and let foreclosure slip in?”

It sounded to good to be true- this agent’s offer to list her property and allow them to continue to occupy at a rental rate that is half of their mortgage. The agent was ready with the paperwork, and then, when it was time to sign, the agent asked my client to issue her a check for $ 2,500, a flat free transaction for the marketing and listing services that she will undertake for her. Then doubt sets in my client’s mind. Why is this person asking me for an upfront payment? Suddenly, she remembered me and the advise I gave her when she attempted a loan modification a few months back, and that is, never to pay anyone an up-front fee, before services are rendered.At that moment, she stood up, and politely refused the agent’s request for a check. She said that she will think about it and will call if ever she finds the need for her services.

My client’s call came in timely as I was reading a C.A.R ( California Association of Realtors) publication that the State Bar of California has issued a warning to the public that short sale fraud is on the rise, statewide speaking.In the advisory, homeowners, buyers, real estate agents/brokers and lenders are advised to watch our for red flags that could suggest fraud, including: 1) a negotiator working without a license; 2) up-front fees being collected without prior permission from the Department of Real Estate, 3) adding hidden fees for buyers to shoulder when placing an offer on a home, 4) misrepresenting market conditions and submitting offers on the property from an affiliated buyer ( which in my client’s case, the agent has a ready buyer, an “ affiliated investor”).

It is not hard to miss that my client could have fallen victim in the hands of this ‘ agent’, given the elements of the red flags mentioned above are evident in her deal. I am glad that my client did not go thru it and signed her future away.

I see a variation of titles being used by short sale negotiators today. Loss mitigation expert, debt negotiator, short sale processor, short sale coordinator- to name a few. However which way they approach you and introduce themselves, it is wise to ask them to show you an active DRE license. Any real estate practitioner should always carry one and must be readily available when asked. Also, ask how many short sale transactions they have facilitated. I always carry a current inventory report of closed sales just in case a potential client asks for it. It is now the resume I carry around these days. Be vigilant in your choice of a short sale agent, if you are considering to do a foreclosure alternative. Seek one who is not only licensed, but one who is knowledgeable, short sale certified, and ethical.

If you or someone you know encountered a short-sale related fraud, complaints can be filed by calling the Attorney General’s Office at (800) 952 5225 or file online at www.ag.ca.gov/consumers/general.php.