The following is a guest post from Nigerian real estate developer Michael Chudi Ejekam.
If it was a booming mortgage market right now, lease options would be the “last option” a buyer and seller would be using. With increased foreclosures, bankruptcies and numerous home for sale on every street, the ideal of lease option and seller financing has returned.
Lease option is really a glorified seller financing with an option date or a date agreed upon by both parties to finalize the deal. A lease option can be finalized in one week and therefore the way to sell your home fast is with a lease option.
How to sell your home fast
A lease option is an option to purchase a property in the future. This is normally used by a buyer who cannot qualify right now and needs time to come up with the extra funds or time to pay off existing debts. A normal lease option would have a deposit, which is considered the option money and a contract agreeing to the terms of the option.
Many mistakes in the past have been made due to the buyer not requesting an appraisal on the property. An option cannot be exercised if the property will not qualify for a loan. A proper lease option must go through escrow and have the buyers put all funds in an account where duly noted receipts are given.
At the time of exercising the option, the buyers will need proof of all deposits, contracts and escrow papers. The title is not transferred to the buyer until after the option is exercised. The buyer has the right to leave the property and not exercise the option. So here are some tips to place in your lease option contract:
- Property to appraise or all money is to be returned to the buyer.
- Seller agrees not to place any other liens on the property.
- Buyer to have quiet and peace enjoyment of property.
- Buyer agrees to pay all taxes and insurance.
- Seller has the right to evict the buyer if he is 30 days late on the rental payment.
- Buyer agrees never to contact the bank (as giving notice to bank would cause the note to be called due).
Alienation Clause in Mortgage Contracts
All banks now have “alienation” clauses in their contracts. Any transfer or alienation of the home to an unauthorized person may give cause to the bank to call the note due. So it is important to keep this deal silent. Also, never transfer the insurance policy into the buyer’s name.
What are the Difference Between Seller Financing and Rent-To-Own
A rent-to-own contract (lease option) has a date when the buyer must exercise his option by refinancing the property in his name. A seller financed mortgage has no date to exercise an option and the seller will agree to carry the loan for the entire period or until the loan is paid in full.
In a lease option the buyers pay a monthly rental payment along with money towards the down payment. So as an example, a buyer may pay $750 for the rent and $750 for the down payment. In a seller financed home the agreed upon amount is amortized over 30 years or a term both parties agree to.
The seller financed mortgage is easier to use as the buyer does not have to worry about refinancing the property later and thus incurring closing cost, appraisal cost and all the extras involved. Typical closing cost amount to 3-6% of the loan amount.
Always contact an Attorney before entering into any lease option agreement. It is better to have legal advice always in these matters. Understand that even if there is a Realtor involved that the Realtor may not give legal or accounting advice.