Archive | December, 2011

Lease Option vs. Owner Carry

19 Dec

There is a big difference between Lease Option and Owner Carry or Owner Financing.  

When you lease option a property, you are still a tenant but have the right to buy the property at a future date.  You give the landlord/seller a deposit that they agree to credit you for, in addition to a portion or your rent each month, that will be used towards your down payment and/or closing costs when you exercise your option to purchase.  Depending on how the agreement is written, you may also be responsible for any maintenance, upkeep and repairs on the property while you live there (remember, you do plan on owning it one day).  

For example, you and the seller agree that you will buy his house for $100,000.  But since you can’t get a loan right now, you will give him $5,000 as an option deposit, and out of the $1000 a month rent you pay, he will credit you $250 each month your rent is on time.  So at the end of one year or 12 months, you’ll have $5000 + (12 X $250 or $3000), which totals $8,000 towards purchasing the house. If you’re able to purchase the house in 12 months with an FHA loan, 3 1/2% or $3,500 would be counted as your down payment and the rest of your credit of $4,500 would be used towards your closing costs.  

The good news is you now have enough money to be used to purchase, had 12 months to fix whatever your credit problem may have been so you can qualify for a mortgage, and you probably won’t have any additional money to come up with in order to get a loan.  You didn’t have to come up with 10-20% as a down payment.  Also, you don’t have to buy the house if you don’t want to but the seller can not sell to anyone else until you decide whether or not to exercise your option. Of course, you have to pay your rent on time or you can void the contract.

The bad news is you are still a tenant and don’t get any tax benefits from paying for the house.  Also, depending on how your agreement is written, you may also be responsible for doing all the repairs on a house you don’t own. And most important, your deposit and any rent credit you may be earning is not refundable to you if you choose not to exercise your option to buy the house.

Owner financing is completely different.  When you purchase a property where the seller/owner agrees to act as the bank, you will actually go through escrow. Your deposit is now a down payment, and your payments will be treated the same way as if the bank was financing with you.  However, several things are important to know:

1. You will have escrow fees and inspection, and closing costs.  Here in Las Vegas that is anywhere from 1-4% depending on the price of the house (the cheaper the house, the higher the percentage because some costs are fixed no matter what the price of the house is).

2. Your down payment will usually be as little as 10% to as much as 50% of  the price of the house, depending on what you and the seller agree to.

3. You will usually pay retail or slightly above retail price for the house.  Seller’s offer financing because they don’t want to sell for the same price the bank owned or short saled house down the street is going for.

4. Sellers offer financing because they can get better interest from you than they can from the bank, so expect to pay 1-5% more for your mortgage.  Right now banks are financing loans for under 4%.  Most sellers are offering to finance you for 5-10%.  Its their house and they can ask whatever they want in interest.

5. The seller usually only agrees to act as the bank for 3-5 years, sometimes 10 years, but seldom longer.  They don’t want to be the bank forever.  So whatever is preventing you from getting a loan now, you have to use this time to fix your credit, stabilize your income, and possibly work with a loan officer so you’ll be able to get a mortgage in a few years.

6. You now become the owner of record and you get the tax write off for the property.  

Owning is always better than dealing with a landlord, but either one of these paths will help you become a homeowner.

Las Vegas in 2012

19 Dec

Every one is speculating on what they think will happen to Las Vegas and the real estate market in 2012.  Is it going up, is it still going down, when we run out of distressed properties, will there be another bubble?

No one know for sure except that there will never be any place like Las Vegas.  People come here for a variety of reasons for work, play, lifestyle, retirement, climate or the opportunity to say they live in a place every one has heard of and some day want to visit.

Personally, I moved here because I was tired of shoveling snow.  Spending 8 years in Lake Tahoe, dealing with an average of 265 inches of snow on my driveway every year since we lived at 6700 feet above sea level was something I was anxious to get away from.  Also, having grown up in Los Angeles, I missed having the excitement and choices a bigger city brings.  Combine that with a wide variety of entrtainment, housing choices and employment options, Las Vegas seemed a great fit for my family.

As I look towards 2012 and put in my two cents about the real estate market, I believe that we have somewhat stabilized as far as prices go.  We may drop a percent, possibly two over the next year, but just in the last month, our available inventory went from just under 12,000 properties to under 9,000.  Prices are incredibly low and our average 3 bedroom 2 bath home sells for approximately $115,000.

Loans are not going to get any easier to qualify for with our politicians are busy fighting with each other, and not forcing the banking industry to make any real changes in the way they do business.  That means people that still see the value in owning their home, or investors who realize its only a matter of time before the market starts to truly correct itself are busy looking for deals in our market.  They are looking for a viable way to enter our real estate market.

If you were one of the many casualties of the bubble, having lost your home to foreclosure or short sale, but would still rather own than rent, you need to consider dealing with a seller who is open to creative financing.  Currently, that’s only about 1% of the houses available in our market, so competition is fierce, but doable.

Don’t let this opportunity pass you by.  Whether or not you have great credit,if you have provable income and a nice deposit sitting earning 1/2 percent in the bank (if you’re luck) then you need to put it towards real estate because at this state of the game, its only a matter of time before it bounces back.