Depends on whether you are buying or selling, and what your intentions are with the property
Owner financing: if the owner has equity in the property he/she can decide when and how to recieve that money at closing. Once enough money has been collected to pay off any mortgages or liens, taxes etc. on the property, the rest would go in your pocket or you could choose to recieve that money over a period of time with interest. Example... if you like a home listed at 100k but the best bank financing you can find is 80%LTV(Loan-to-Value) ratio the most that the bank would lend you is 80k(not enough to buy the home) in this instance if the owner owes 80k or less on the property they can decide to let you buy the home and owe them the other 20k payble with interest over a specified term. Good for you - you get a home Good for the seller - they get a good sound investment
Lease Option: nothing more than a lease agreement between two parties with either a combined or seperate Option to buy agreement giving you the right to purchase the property under certain pre determined
terms and at a pre-determined price. A lease option is an excellent tool for people with damaged credit to own a home or for investors to keep their tenants in-line (they have a larger stake in the property than just renting it) also can be a useful tool in flipping or turning over real estate quickly as you have control of the property but don't actually take possession of it or sign away all of your personal possessions on a mortgage.
In this case i would be the seller. I thought it might be a better way to create cash flow and take advantage of the money i could make off the interest?
If you don't mind being a landlord then the lease option will probably give you the greatest return. You will get a sizable sum as option consideration - not a deposit- then hopefully generate a positive cash flow by using a rent credit to your advantage. You should be able to get a higher rent if the tenant knows that a portion of the rent is building for a down payment. Then if the T/B is able to get financed you get a big payoff at the end. You should be able to negotiate a higher sales price by factoring in appreciation for yourself and in the meantime you still own the property so you get the depreciation until you cash out. If the T/B cannot buy or vacates you get to do it all over again - another option consideration and cash flow - this time with a higher sales price
As a mortgage professional, I especially like the Lease-options because of another reason: When the tenant executes the option after at least a year, I am able to secure him/ her financing based on it being a REFINANCE rather than a purchase. This enable them to use the difference between the option price and the market value when determining LTV.
The most important aspects of getting financing this way are to make sure that the lease-option is notarized and recorded.
I have helped quite a few people get into their first mortgage this way with great success. And the really great thing is that they have access to the equity in the property right away if they need it for home improvements, etc.[ Edited by jrothstein on Date 12/30/2004 ]
I noticed your advice on getting the lease-option notarized and recorded.
I'm about to do a sandwich lease. My mentor said that it is important not to let the subtenant record anything because if they do, and they don't execute their option, they could disappear leaving a cloud on my Seller's title?
Please explain how I can protect my seller's interests.
There is something else to consider. Under a lease-option you can normally evict of necessary while with seller financing you now must foreclose. An eviction is much much cheaper that a foreclosure and takes a lot less time.
Depending on your State's laws, some LO's may also qualify as an "installment sale" (seller financing" so be careful to have your contracts reviewed by a competent attorney to be sure you r contracts protect you adequately.
Depends on whether you are buying or selling, and what your intentions are with the property
Owner financing: if the owner has equity in the property he/she can decide when and how to recieve that money at closing. Once enough money has been collected to pay off any mortgages or liens, taxes etc. on the property, the rest would go in your pocket or you could choose to recieve that money over a period of time with interest. Example... if you like a home listed at 100k but the best bank financing you can find is 80%LTV(Loan-to-Value) ratio the most that the bank would lend you is 80k(not enough to buy the home) in this instance if the owner owes 80k or less on the property they can decide to let you buy the home and owe them the other 20k payble with interest over a specified term. Good for you - you get a home Good for the seller - they get a good sound investment
Lease Option: nothing more than a lease agreement between two parties with either a combined or seperate Option to buy agreement giving you the right to purchase the property under certain pre determined
terms and at a pre-determined price. A lease option is an excellent tool for people with damaged credit to own a home or for investors to keep their tenants in-line (they have a larger stake in the property than just renting it) also can be a useful tool in flipping or turning over real estate quickly as you have control of the property but don't actually take possession of it or sign away all of your personal possessions on a mortgage.
Hope this helps
In this case i would be the seller. I thought it might be a better way to create cash flow and take advantage of the money i could make off the interest?
If you don't mind being a landlord then the lease option will probably give you the greatest return. You will get a sizable sum as option consideration - not a deposit- then hopefully generate a positive cash flow by using a rent credit to your advantage. You should be able to get a higher rent if the tenant knows that a portion of the rent is building for a down payment. Then if the T/B is able to get financed you get a big payoff at the end. You should be able to negotiate a higher sales price by factoring in appreciation for yourself and in the meantime you still own the property so you get the depreciation until you cash out. If the T/B cannot buy or vacates you get to do it all over again - another option consideration and cash flow - this time with a higher sales price
As a mortgage professional, I especially like the Lease-options because of another reason: When the tenant executes the option after at least a year, I am able to secure him/ her financing based on it being a REFINANCE rather than a purchase. This enable them to use the difference between the option price and the market value when determining LTV.
The most important aspects of getting financing this way are to make sure that the lease-option is notarized and recorded.
I have helped quite a few people get into their first mortgage this way with great success. And the really great thing is that they have access to the equity in the property right away if they need it for home improvements, etc.[ Edited by jrothstein on Date 12/30/2004 ]
jrothstein
I noticed your advice on getting the lease-option notarized and recorded.
I'm about to do a sandwich lease. My mentor said that it is important not to let the subtenant record anything because if they do, and they don't execute their option, they could disappear leaving a cloud on my Seller's title?
Please explain how I can protect my seller's interests.
There is something else to consider. Under a lease-option you can normally evict of necessary while with seller financing you now must foreclose. An eviction is much much cheaper that a foreclosure and takes a lot less time.
Depending on your State's laws, some LO's may also qualify as an "installment sale" (seller financing" so be careful to have your contracts reviewed by a competent attorney to be sure you r contracts protect you adequately.
j rothstein
I'm a little confused on how it becomes a refinance can you please explain. thanks in advance