Robert Scott, our RE/MAX Advantage owner, reminded me this week of the old wrap around mortgage. It was used often during the 80's down market in order to make sales happen. Today, we have so many things going for us; prices are decreasing causing homes to be more affordable, interest rates are so LOW, lots of inventory gives buyers more of what they want, and low down payment loans are still available. A major obstacle is getting people qualified for ANY mortgage. As real estate professionals, we need to sharpen our skills to help those buyers who have a desire to buy and sellers who have a desire to sell; even if in an unconventional manner.
Here are a few key points from the creative financing course that Ryan Sparks, real estate attorney, and I taught this past week. Even though Ryan and I differ on our opinions of these creative financing tools, (he prefers a lease purchase), we both agree that extra measures are needed in this market. Lease Purchase vs. Land Installment Contracts:
1) Lease Purchase normally makes a buyer think of the situation as temporary. 85% of them never close. We all know that once a buyer moves in, buyer remorse can set in heavily. A Land Installment Contract provides immediate ownership with ZERO maintenance issues on the shoulders.
2) When writing a lease purchase, get a non-refundable DEPOSIT that will go toward the purchasers down payment at closing. Take a fee for your services out of this deposit. Make sure you have this agreement in writing with your client and your broker. This fee is non-refundable if it does not close. The remainder of your fee will be paid at closing (if it ever closes). Remember to write both a sales contract and a rental agreement using the most up to date form from the AAR website. Refer to each document on each document. Be clear that you will NOT collect rental payments! A land installment contract will pay your broker a part of the DOWN PAYMENT for putting the sale together. Then, you're removed from the situation because ownership is already in place at closing. A few thousand dollars for a small amount of work is a good paycheck.
3) Write a lease purchase as simply as possible. Most agents try to get way too complicated with them. DO NOT TAKE ANY MONEY FROM THE MONTHLY PAYMENT TO CONTRIBUTE TO DOWN PAYMENT OR PRINCIPLE REDUCTION. Monthly rent should be for the privilege of living in the house only. You can put additional down payment installments in your initial contract, ie, $2500 every six months. A land installment contract is normally a down payment up front that allows the purchaser to in a way, assume, the seller's principle balance and loan terms. The purchaser will either pay the bank directly. Or, one of the best ways I've found is to have the payment electronically deposited into the seller's account which is then electronically deposited into bank's account each month. Then, all parties are ensured payments are being made and are timely.
4) Eviction is necessary for a lease purchase and can sometimes be costly and frustrating. Automatic foreclosure happens with a land installment contract if a payment is ever 30 days late. The property is reverted back to the seller. Eviction may still be necessary, but it sends a CLEAR message to the purchaser right up front.
5) Both have definite risks for buyers and sellers. But, provide alternative methods for getting property sold. DISCLOSE all risks to your clients. Or, simply have them call Ryan Sparks for full disclosure before moving ahead.
You'll gain loyalty and credibility from clients when you learn how to master these transactions because you'll be able to provide viable options for your clients.
