Re: Buyer not buying in time, what do I do?
am 27.01.2006 03:57:18 von CREIU.com
My 2 cents:
We teach Rent to Own and Installment Sales for property on the selling
side.
www.creiu.com
Condos do not attract the best buyers, there are so many of the condos,
so many bad tenants are are not respectful, condo fees that eat into
your yield as far as rent to mortgage PITI payment ratio, etc.
So we tend to either:
1. Contract for Option to Purchase
Better than a Lease with Option
>From Jack Shea, a great investor in Options, and Mark Warda, JD, the
best RE Lawyer for Land Trusts I know of, wrote:
"9 Reasons to Sell with a Lease Option
Simply put, lease option agreements can help you make more profits from
your rental properties with less work and less stress. Every landlord
knows the problems with rental properties: vacancies, maintenance
problems, delinquent tenants. All of these can be lessened by using
lease option agreements. And you can get some added bonuses such as a
new roof or a swimming pool installed.
The one big disadvantage to most lease option agreements is that the
tenant receives a vested right in the property.
This means that you need to go through a full blown foreclosure to get
him out, even if he put up only a few hundred dollars.
But with the Contract For Option to Purchase a tenant gets no vested
rights, only a contract right which does not vest until it has been
fulfilled.
Under this system, the tenant can be evicted in the same manner as if
he did not have an option.
Years ago, after hearing lease-options promoted and discussed among
investors, I was impressed. This was a simple solution to virtually
eliminating maintenance, vacancies and turnover costs while collecting
above market rents. The paperwork was also simple and easily drafted.
Inspired by these dramatic benefits, I lease-optioned a house to a
tenant in 1981. After only a few months, the rent slowed, then
stopped. The regular 3-day notice was posted, and an eviction was
filed. The tenant answered, and to my dismay, he hired an attorney. I
had recently started working with attorney, Mark Warda, on Land Trust
matters, and since he was the Trustee on the property, I hired him to
complete the eviction.
"No eviction" said the judge.
The tenant has a "valuable right" in the property, and it must be
foreclosed by "judicial process".
We then had to start a foreclosure.
After more than a year and more than $10,000 in lost rent and expenses,
I regained possession of the house.
In discussing a method of avoiding that situation again, we came up
with the concept creating a contract to deliver an option in the
future.
A simple contract was devised to deliver an option after a series of
payments, events or time periods have passed. It works.
Rent to Own
Household debt is at an all time high (1990 = $4+ trillion, 2003 = $8.5
trillion).
That debt is 108% of income.
Bankruptcy filings, up 19% last year, are topping 1.5 million a year.
The average U.S. household with one credit card owes over $8500 in card
debt.
The staggering debt load has helped the economy.
Autos, housing, furnishings, consumer electronics and other segments
have prospered.
Debt has grown faster than income and that can't continue forever.
This will create continuing opportunities for investors.
The burdens will continue the bankruptcy filings even with some
tightening of the laws being sought by lenders.
Foreclosures will also continue at record levels.
There will be a supply of bank owned real estate and possible short
sales.
There will also be a supply of former owners looking for housing.
These people will not want apartment living.
We have had many former owners seek lease/ option homes as a means of
getting re-established and building credit.
A recent study by the National Association of Realtors showed that:
A. Sixty-five percent of renters plan to buy a home.
B. Almost fifty percent of renters felt they could not afford a home
at this time.
This study shows a large gap between desire to own and ability to own a
home.
The auto industry has dramatically moved to leasing as the way to keep
moving new cars. In used cars the Buy Here-Pay Here and Leasing
Dealers have met the needs of the non-bank qualified majority.
Appliances, furniture and other consumer goods are available to
marginal credit buyers on Rent To Own terms. There is a vast unmet
demand for Rent To Own housing.
Apartment and house renters desire the security, stability, prestige
and equity build-up that a Buy While Renting program offers. They get
the benefit of fixed payments with modest increases and a fixed sales
price for a period of time.
A "Rent To Own Agreement" is a people management system, not property
management system, since it attracts
future buyers who need and desire help in accumulating a down payment.
They take the responsibility for management and maintenance in return
for the credits and assistance in buying their home.
Benefits to the Tenant
Major benefits in addition to the equity and security are:
-> A clean, functional home. We deliver a freshly painted and cleaned
home, sometimes with new carpet, tile, and other improvements. The
tenants can identify with the home and they see it as a suitable
property to own. Tenants have added improvements, sprinkler systems,
dishwashers, and other improvements to increase their use and enjoyment
of the property.
-> Fixed monthly payments for two years. The payments are set, but they
increase each year. The increase is normally four or five percent, and
is attributed to the ever-increasing taxes and insurance. There is
consolation in the fact that the increases will not be any larger than
stated.
-> Fixed credits for care of the home. The credit of $100 per month, or
per the contract, will establish a FHA 3% down payment, when combined
with the deposit. In doing hundreds of these contracts, we find that
these tenants do more maintenance than the average renter, but
certainly not all. They will not repair a roof, or replace an air
conditioner, except in rare occasions.
-> Credit for all deposits. The tenant receives down payment credit for
what would normally be a last month's rent and security deposit. They
view this as a positive use for applying to the down payment, rather
than funds wasted for rent and security. When tenants do not buy, which
happens about 65% of the time, the funds held for a down payment will
be used as the last month's rent, and a security deposit, regardless of
what the documents say. When the tenant is unable to buy, and decides
to move, they will not pay the last month's rent, or additional
security. The-funds held usually cover the unpaid rent and damages.
-> Credit counseling. The lessor can increase or decrease the number of
tenants buying these optioned properties. If they do nothing, and force
the tenant to get their own mortgage financing, some will do that. If
the lessor counsels the tenant, and reviews their credit report with
them, advises on negative items, and how to remove them, and connects
them with an experienced and aggressive mortgage broker, many more will
close. I have seen a single parent, with three children, many credit
problems, and student loans, work their way through the process and
close on a FHA loan.
-> A fixed sales price for a set time.
The price is usually set at neighborhood comparable list prices, which
the buyer can verify. When the property is sold, without a Realtor,
vacancy, and with fewer repairs, the net to the seller has been
acceptable, even with an increase in market prices.
At this time, we are seeing 10%+ appreciation in many markets, and an
alternate pricing formula could be used. A fixed price could be held
for one year, and an appraised price anytime after the first year. The
average of three appraisals approach could be used to remove risks for
either party.
Benefits to the landlord/Seller
There are many benefits for the sellers, the greatest of which are
attitude and behavior.
Other advantages are:
-> Above market income. Lease contract will command a rent about 10%
above the market for a similar property.
Tenants will pay that with the belief that they will eventually benefit
from the higher than average rent. Rent comparables are not an exact
science, and we have always been able to get top market rents on option
properties.
-> Greatly reduced repair expense. This is a definite benefit for the
owner, and we quantify it in an amount of about 30% less maintenance
costs than rented houses of the same size. This program definitely does
not eliminate maintenance costs, regardless of claims of option
promoters.
-> Tax deferred income. The option deposit is not taxable until it is
exercised, or abandoned. These funds can be applied to additional
purchases or anything desired and paid for on closing by normally
reducin~the selling price.
-> Low turnover. We average between four and five years tenancy on
option properties. When the option expires, after two years, we
sometimes extend them, or go to a direct lease. The lessor can always
grant another option at market price, in the future. We have been able
to average over 100% occupancy on all properties, due to the advance
rent and security deposits and the ability to rapidly re-rent
properties.
-> Minimal management effort. Contract for option tenants generally pay
well, and cause minimal problems, but certainly not zero. I believe you
can manage 35% more option properties than plain rentals, with the same
amount of effort. The tenants have something invested, and intend to
own the house up until they lose a job, get divorced, or go bankrupt.
-> Full retail sales price. As stated, the selling price at
neighborhood retail, is not a contested item, since the buyers do not
have the leverage of a cash buyer, when entering this agreement.
-> Property improvements. The tenants sometimes add improvements for
their own use and enjoyment, and we have
seen room additions, new carpet, tile, paint, landscaping, storage
buildings, and many more installed by tenant optionees. Some of these
did not buy the property, and left the improvements without
compensation.
-> Pre-set rent increases. As discussed, the 5% increases are part of
the initial lease, and may be above or below the market, depending on
inflation, but that is our best estimate.
-> No loss of ownership rights. The contract for option states and
restates that an option will be delivered in the future, after the
specific performance on the lease and that no right title or interest
is passed at the execution of the contract. This concept can be used
with any lease, on any kind of property, of any value.
The Rent To Own management system could produce the greatest income per
hour invested compared to any other
buy, sell, fix, exchange, mortgage or broker skill you could develop in
real estate. Any lease can be used withtbe lease and contract for
option.
We recently consulted on a commercial lease for a multimillion dollar
factory. There was a 35 page lease and a one page contract for option.
The owner was concerned that the tenant, a new corporation, in a new
business, could tie up his property in the event of bankruptcy. The
contract for option was accepted by all parties and a lengthy
foreclosure will not be required.
--------------------------------
Again, we coach contract for deeds and contract for option to purchase.
I hope this has been of service, and if you need any assistance in
creative real estate solutions (not contract disputes, I'm afraid!)
please look me up at www.creiu.com
All the Best,
Brian Gibbons
Investor in Real Estate since 1986