Sara’s Homes

Today, options to purchase, lease options and lease purchase agreements are three different financing documents. The variances are state specific and not all states have identical laws. Before entering into an agreement with a seller, buyers should obtain the advice of a real estate lawyer. The information below is an overview and is not meant to be construed as legal advice.

Basics of an Option

• Buyer pays the seller option money for the right to later purchase the property. This option money may be substantial or as little as $1.

   

• Buyer and seller may agree to a purchase price now or the buyer may agree to pay market value at the time the option is exercised. It is negotiable. However, most buyers want to lock in the future purchase price upon inception of the option.

   

• The term of the option agreement is negotiable, but the common length is generally from one year to three years.

   

• Option money is rarely refundable.

   

• Nobody else can buy the property during the option period.

   

• The buyer can sell the option to somebody else.

   

• If the buyer does not exercise the option and purchase the property at the end of the option, the option expires.

   

• The buyer is not obligated to buy the property.

Basics of a Lease Option

• Buyer pays the seller option money for the right to later purchase the property. The lease option money may be substantial.

   

• Buyer and seller may agree to a purchase price now or the buyer may agree to pay market value at the time the option is exercised. It is negotiable. However, most buyers want to lock in the future purchase price upon inception of the lease option.

   

• During the term of the lease option, the buyer agrees to lease the property from the seller for a predetermined rental amount.

   

• The term of the lease option agreement is negotiable, but the common length is generally from one year to three years.

   

• The option money generally does not apply toward the down payment.

   

• A portion of the monthly rental payment typically applies toward the purchase price.

   

• Option money is rarely refundable.

   

• Nobody else can buy the property during the lease option period.

   

• The buyer generally cannot assign the lease option without seller approval.

   

• If the buyer does not exercise the lease option and purchase the property at the end of the lease option, the option expires.

   

• The buyer is not obligated to buy the property.

Basics of a Lease Purchase

• Buyer pays the seller option money for the right to later purchase the property. This option money may be substantial.

   

• Buyer and seller agree on a purchase price, often at or a bit higher than market value.

   

• During the term of the option, the buyer agrees to lease the property from the seller for a predetermined rental amount.

   

• The term of the lease purchase agreement is negotiable, but the common length is generally from one year to three years, at which time the buyer applies for bank financing and pays the seller in full.

   

• The option money generally does not apply toward the down payment.

   

• A portion of the monthly lease payment typically applies toward the purchase price.

   

• Option money is nonrefundable.

   

• Nobody else can buy the property unless the buyer defaults.

   

• The buyer typically cannot assign the lease purchase agreement without seller approval.

   

• Buyers are often responsible for maintaining the property and paying all expenses associated with its upkeep, including taxes and insurance.

   

• The buyer is obligated to buy the property.

Doing a Lease Option / Lease Purchase

Hire a real estate lawyer to draw the documents and explain your rights, including those of possession and default consequences. The property might be encumbered by underlying loans that contain alienation clauses, giving the lender the right to accelerate the loans upon sale.

Sometimes sellers give the option money to their real estate agent as full payment of commission. Agents are not always involved in the exercise of lease options or fulfillment of lease purchase agreements and, even if you have retained real estate agent representation, you still need a real estate lawyer. Agents are not lawyers and cannot give legal advice.

In the event of a lease purchase, obtain all the disclosures and do your due diligence just like you would on a regular sale. This means:

• Get a home inspection.
• Examine the title policy.
• Obtain an appraisal.
• Read seller disclosures.
• Consider obtaining pest inspections, a roof certification, home warranty plan and hiring other qualified inspectors.

Lease Purchase Benefits for Sellers and Buyers

Lease purchase agreements are commonly offered by sellers of hard-to-sell properties. Think about it, if the property was easy to sell, the seller would sell it to a conventional buyer who would pay the seller cash.

• Sellers generally get market value at today's prices and relief from paying a mortgage on a vacant property.

   

• Although the lease payments may exceed market rent, the buyer is building a down payment and banking that the property will appreciate beyond the agreed upon purchase price.

   

• Buyers generally make a small down payment, with little or no qualifying, making a lease purchase an attractive way to ease into the benefits of home ownership.

   

• Buyers also receive a forced savings plan since part of the lease payment is credited toward the purchase price at the end of the lease option agreement.

   

• If the buyer defaults, sellers do not refund any portion of the lease payments nor the option money and may retain the right to sue for specific performance.

For more information, contact a real estate lawyer.

In most states, home sellers must disclose any defect they know about that could affect how desirable -- and marketable -- their home is before they sign a purchase contract. Even in the six states that lack a "mandatory seller's property condition disclosure" (Alabama, Arkansas, Kansas, Vermont, West Virginia and Wyoming), the state's licensing agency may require real estate agents to tell buyers what they know. In all states, real estate agents who belong to the National Association of Realtors are obligated by their code of ethics to disclose any defects they know about.

But you may have fallen in love with a house, and spent hours preparing a purchase contract, before the disclosures are made. You should always make your purchase contract contingent on a professional home inspection ($300 to $350). Home inspectors could miss hidden problems, however, such as a basement that floods during a downpour.

This list of red flags, recommended by Kathleen Kuhn, president of HouseMaster, a nationally franchised home-inspection company, and Bill Richardson, president of the American Society of Home Inspectors, can help you identify potentially pricey problems. You can use your observations to winnow your choices or to factor in condition when you negotiate price with the seller.

Poor water pressure. Aside from issues of comfort and convenience, low water flow may indicate plumbing problems, such as corroded pipes that will need to be replaced down the road. Tearing out old plumbing and replacing it with copper pipes can run $2,000 to $15,000 or more in a typical 1,500-square-foot home. A less costly alternative is cross-linked polyethylene (PEX) piping, which unlike rigid copper piping, is flexible and easier to install (approved for potable use in all U.S. model plumbing and mechanical codes, but may not be approved in local building codes).

Among tests you can do: Run water in a bathroom sink and check for weak flow. Flush the toilet while the water is running. Does the faucet flow drop off during the flush? In the bathroom located farthest from the water heater, turn on the hot water. Is there an unduly long delay before the water turns hot?

Ceiling stains. Something's leaking. If the stain appears beneath a bathroom, odds are the shower is leaking. It may merely need recaulking or regrouting, but it could also require ripping out tile and replacing the shower pan, a much more costly process (about $1,500). Most roof leaks result from neglected flashing that seals "valleys" in the roof or around a chimney or vents (cost to repair: $200 to $500). But roof leaks may also mean it's time to replace shingles -- at $100 to $350 per 100 square feet for asphalt shingles and $210 to $1,000 for wood shingles.

Troublesome doors. Are the doors hard to close? Do they swing open by themselves or fail to open fully? If you have one bad door, it may simply have been installed incorrectly. But more than one may indicate a serious structural issue, such as a foundation that has settled or framing that is deteriorating. Fixing this problem can require structural and geotechnical engineering reports and thousands of dollars in repairs.

Overloaded electrical outlets or lots of extension cords. Today's electrical demands may exceed the capacity of homes built as little as a decade ago, says Kuhn. You'll spend $75 to $250 to have an electrician add a 120-volt outlet to an existing circuit. Or, if the electrical system is very outdated, it may require a new electric panel. A new, 100-amp panel will cost $1,500 to $2,500.

Exterior features that slope toward the home. A porch, patio, driveway or grading that slopes toward the home all but guarantees water in the basement. And that may lead to structural decay, mold and insect infestation. In the basement, a musty smell may indicate previous flooding or ongoing moisture problems. Check the walls for stains, dark or light, which are tell-tale signs that water has penetrated the walls.

Solving the problem may be as simple and cheap as adding gutter extensions or regrading soil away from the home, or it could require thousands of dollars to excavate and build drains. Some homes may require exterior drains (one at the bottom of a sloped driveway, for example) as well as buried drains.

Odors. Cigarette smoke and pet odors can be hard to get rid of. And if a home smells too clean -- heavy with the scent of cleaning products (especially bleach) or plug-in deodorizers -- the seller may be trying to cover up an odor, such as mold or urine. If so, you need to inquire further, says Richardson, of the American Society of Home Inspectors.

Synthetic stucco siding. This must be installed precisely or else moisture will be trapped behind it, resulting in mold and decay. In the worst case, the siding will have to be replaced. For a medium-sized house (1,250 square feet of exterior surface area), replacing vinyl siding can cost $2,500 to $8,750, while wood or fiber cement siding can cost $5,600 to $10,000 or more. Especially in humid climates, you may want to pay for a special inspection. HouseMaster charges $600 and up, depending on how much of the material has been used and the size of the house.

If you find out before you close your purchase that the seller deliberately misrepresented or failed to fully disclose the home's condition, you may have the right to rescind the contract under state law. If it's a done deal, you'll probably have to sue the seller to recoup your damages. In some states you can also seek repayment of your legal costs. Consult with a lawyer who specializes in real estate fraud. If you have reason to believe that the seller's agent was negligent, you can take it up with the local Board of Realtors (www.nar.com, click on "local and state associations") and the state's licensing agency (to find yours, visit the Web site of the Association of Real Estate License Law Officials).

• The property must be the home owner’s principal residence.
• The home owner must be delinquent on the mortgage or close to defaulting.
• The loan must have been made before Jan. 1, 2009, and be for less than $729,750.
• The borrowers’ total monthly mortgage payment must exceed 31 percent of their before-tax income.

The current up-front premium is set at 1.75 percent of the value of the loan. FHA may decide that an increase in that premium is needed also, officials said.

An arms-length affidavit is a document created by a short sale bank in an attempt to prevent sellers from selling to a relative and to curb mortgage fraud. The reason the bank does not want a seller to transfer title to a relative in a short sale is because sellers cannot profit from a short sale.

Sometimes sellers make side agreements with relatives or friends to act as a straw buyer. Then, after the transaction closes, those pretend buyers quickly transfer title back to the seller. This practice, in affect, means the sellers have repurchased their home at maybe half the cost, which greatly benefits those sellers. But banks make the rules, and banks say sellers can't benefit. If they wanted sellers to benefit, they would have agreed to a loan modification.

What Does an Arms-Length Affidavit Contain?

Most banks create their own arms-length affidavits. Therefore, the language can vary from one affidavit to another. Following are the points contained in a basic arms-length affidavit:

• The arms-length affidavit references the property address, name of the sellers, buyers and agents, and the fact this is an arms-length transaction.

   

• No party to the short sale contract is a family member, business associate or a person who shares a business interest with the seller.

   

• There are no hidden terms nor special agreements among the buyers, sellers and / or agents.

   

• Once the transaction closes, the sellers will not rent back the home nor regain title to it.

   

• None of the parties will receive any compensation except for the commission paid to the agents.

If you sign an arms-length affidavit on your short sale and then violate it, you could be held liable for mortgage fraud. Mortgage fraud falls under jurisdiction of the F.B.I. Moreover, if anybody tells you that it's OK to sell to a relative, make sure that you clarify your relationship with the buyer to the bank before closing. I don't know of any banks that will let you do it.

Who Needs a Real Estate Lawyer?

Both parties. Short sale sellers, especially those who are unrepresented, should seek legal and tax advice. But if they refuse to hire an agent, they probably won't hire a lawyer, either. However, that doesn't mean that you should ignore the recommendation to call a real estate lawyer.

If you are contemplating buying a short sale directly from a seller in foreclosure, hiring a real estate lawyer will probably save you money in the long run. Depending on your state laws, the seller might be able to successfully sue you after closing and regain control of the property. Then you would be out-of-pocket lawyer fees, court fees AND you could lose your home. So, if the seller isn't smart enough to seek legal representation, don't make the mistake of sliding into the same rocking boat.

Writing Short Sale Purchase Offers

Decide on an offer price. To the extent the seller may face short sale tax ramifications on the amount of debt relief or face a deficiency judgment, the seller will likely not have a stake in the amount that you offer. It will be the lender's call. Above all, write contingencies in your offer such as:

• Subject to the existing lender's acceptance and your negotiation directly with the lender. Ask the seller to give you written authorization to talk with the lender.

   

• Subject to a home inspection and other such inspections as lead paint, natural hazard disclosures, pest reports, roof certifications, sewer / septic inspections and mandated seller disclosures.

   

• Subject to your loan funding.

   

• Subject to an appraisal.

   

• Subject to your approval of title policy commitment / preliminary title report.

Negotiating with Lenders on Short Sales

If the seller has not already talked with the lender, advise the seller to write a hardship letter and FAX it to the lender. Before the lender will consider your offer, the lender will want assurance that the seller has no assets to attach. In addition, depending on the lender, it may also want documentation such as:

• Preapproval letter from your lender.

   

• Estimated certified closing statement.

   

• Certified closing instructions.

   

• Title policy commitment / preliminary title report.

   

• Evidence of your earnest money deposit.

   

• Profit and loss statement, if you are self employed, and last three month's of bank statements and / or 2 years of tax returns.

   

• List of recent comparable sales in the neighborhood.

"Ignorance is bliss" was never said about real estate purchases for 7 good reasons:

1. "Knowledge is bliss" may not make it as a buyer's slogan either, because you don't have to know it all—just what's relevant to success as you define it. Different sets of knowledge are important in different buying situations, so the "bliss" generalization may not be specific enough to be useful. "If it is to be, it's up to me" could be an excellent mantra since determination will drive buyers, both to discover what they don't know and then, to fill that knowledge gap. This combined effort will assure a buyer is well equipped to make confident buying decisions.

2. Generalizations are self-defeating when evaluating properties since it is how each is unique that addresses specific value to a specific buyer—if you'll excuse the generalization. All first-time buyers should not seek the same type of real estate solution just because they have never owned real estate before. Each of these buyers, whether they purchase alone, as a couple or with several friends or family members, has a different set of needs, weaknesses and advantages. When generalities are stressed, real estate solutions often concentrate on weaknesses like low down payments. Customized solutions, based on real estate knowledge, should focus on strengths which would counterbalance apparent weaknesses. For instance, first-time buyers may have more creative determination, which can allow them to tolerate living with boarders or tenants. These contributors to mortgage payments create a number of financial benefits and can turn an otherwise financially-out-of-reach property into a great investment solution. (See Pur-Plexing for more on this topic.)

3. Assumptions cost money and waste time. Assume nothing, including that you know what you don't know. Experienced real estate professionals have a wealth of practical knowledge available to fill your knowledge gaps, but you have to be receptive to gain the full benefit. For instance, do you ask questions and listen to the answers? Find out what you're assuming when you view properties, evaluate value and prepare an offer to purchase. The conscious effort and deliberate intent of this clarification means money in your pocket. Determination will enable you to put your advantages into action and use the real estate professional's knowledge to overcome weaknesses. Remember the parsing of "assume" ( make an "ass-[out of]-u-[and]-me" ) if you find yourself thinking or saying, "But I assumed…" and get back in control.

4. Fear has driven too many buyers to act in haste and repent in "if only I'd…" whining that can go on for years. Fear of missing out in a down market or in an up market, or in a variety of other "losing out" scenarios, can cause buyers to dive into a buying or not buying decision which may not be in their best interest. That's why working with a buyer agent, who places your interests first, can be a great strategy for ensuring you have all the knowledge necessary to protect yourself and gain financial advantage at the same time.

5. The impossible may just take a little longer in real estate, but the impossible can happen. Your dream property can be within reach wherever you start financially, but you'll need a solid set of strategies to get you there, not just dreams. Serious about owning your own horse ranch or waterfront castle? Talk to an experienced real estate professional who works in your ideal location to chart a reverse-engineered, long-term course toward that goal. With each property you buy along this clear path, you'll move closer to your high-value goal. It may take two or more real estate purchases and some clever investing, but if will be an interesting progression. If you're determined and build the right team—real estate professional, lawyer, mortgage broker, home inspector…—what's impossible?

6. The unexpected must be expected when buying a home, cottage or investment property. Worst case scenarios, contingency strategies and "Plan B" alternatives are creative tools in preparing to achieve financial gains and desired priorities. These approaches help you react favourably to the unexpected, but hopefully not unanticipated, and take advantage of the opportunities that lie there. Experienced professionals can predict the types of expected and unexpected happenings relevant to your situation. It could be taking advantage of the timing for new listings or the types of lenders beyond banks that hold financing choices for you. Negotiations are all about the unexpected. Most buyers are so focused on purchase price they forget that closing date, number of conditions, what's included in the purchase and other factors can weigh in to reduce the final sale price—that's where professional negotiators come in.

7. Cashflow is king. Beyond the purchase price, cash is necessary to pay for lawyer fees, title insurance or a survey, reimbursing sellers who paid the whole year's property taxes, and on the list of closing costs goes. The professionals involved will provide you with details on possible expenses. While you may have enough cash to close, do you have enough cashflow for owning? Over the first year, unexpected expenses can crop up, so create a projected ownership budget at the same time you go over purchasing costs. This foresight should keep you out of the "house rich—cash poor" category.

With real estate, the best goal is not "buying," but "owning and enjoying" for a lot of great reasons.