Owner Will Carry arrangements - educate me

[Porsche-O-Phile]

I'm doing some research into these kinds of "rent to own" deals since they seem to be becoming more common out here and might represent a nice alternative to coughing up tens of thousands of dollars up front for a down payment with a bank. Admittedly though, I know very little about these, the specific terms and associated risks, so I'll consult the Pelican Brain Trust first and do a little more research.

Here's what I've been able to piece together (feel free to confirm, expand upon, correct or utterly refute my beliefs to date):

- It sounds like (mostly) these things involve an existing owner who is either gambling with their title to make money off of either (1) the renter/prospective buyer defaulting on the terms somehow or (2) deciding not to exercise his purchase option at the end of the contract term, OR one who is in deep schit on their monthly payments (becoming more and more common with ARM resets).

- Do the current owners typically make arrangements with their banks/lenders to transfer title upon completion of the contract term if the renter/prospective buyer decides to "execute the option", or is he/she on their own with respect to securing their own separate, new loan/mortgage through their own lender (possibly having to cough up ANOTHER down payment, this one for the mortgage writer)?

- Is there typically any claim on title or right to title as a renter/prospective buyer in this type of arrangement?

- If you're living there and the owner either pockets the money and defaults (going into foreclosure) or otherwise goes into foreclosure with his lender, do you have any recourse (i.e. right to rehabilitate the loan and seize title)?

Obviously I'd check with an attorney before proceeding on anything and a lot of the specifics might be case-by-case, but I just want to get a general feel for what you more experienced guys think about this. As a person who is looking to buy eventually (but not right away) this might be an awfully nice hedge position if the specifics don't make it too terribly risky or don't put me over a barrel. Certainly might be simpler/easier than dealing with the morass of banks, lenders, tight credit, day-by-day standards, high down payment requirements and people looking to screw buyers over until things settle down a bit in any case. . .

Thanks in advance for any info.

[azasadny]

Is this the same thing as "land contract"? When we purchased our current home (not on land contract), back in '92, we bought it from the owner, went through a local attorney who specialized in real estate transactions and everything went great. I imagine these types of transactions are also best handled by a local, experienced attorney. Just my .02...

[john70t]

This is a good thing for both parties IMO.
-Seller gets very high rent for a while, gets to collect interest, and gets (possibly) a renter who has an emotional/economic interest to actually take care of the property.
-Buyer doesn't have to go through banking application hell, avoids extra fees, and gets the satisfaction of "owning" property, until the balloon payment is due three years out.

[Rick Lee]

I've seen some rent-to-own deals around here and they seem sort of like betting on future property values. The deals go something like you agree to a fixed price, sign a one or two year lease, part of your rent goes to down payment and then you do the deal when the lease ends. But if you signed onto a $300k sales price today and have to find financing for it in two years and the value has dropped, what do you do then? Sure, you walk. And it's no great loss that your down payment is gone, since you'd have had to pay rent to someone anyway. Just seems kinda risky in this environment.

[berettafan]

typically this is offered because no sane bank would finance the property at such a price OR no sane person would even think to ask a bank to do so.

OR the seller wants an installment sale for tax reasons.

OR, as mentioned, the seller is a top notch slum lord who fully expects 'buyers' to default after a period of time. Said 'seller' has figured out the short, inexpensive method to do all the req'd paperwork and legal filings.

[berettafan]

Think of 'Rent a Center' as a version of this concept (the 'slum lord' version anyways). Those people prey on idiots and make their living ensuring that we have a permanent underclass.

[Porsche-O-Phile]

Well, I'm asking from actually two sides:

1. As a prospective buyer, I think this might be a very nice/convenient/easy way to sidestep the entire credit mess B.S. that's likely to take many more quarters or years to sort out before some kind of sanity returns to mortgage lending.

2. My in-laws currently are sitting on three properties back on the east coast that they can't move (or more correctly won't sell at the price required to move them). If I can do some good, solid research in this area and/or find out the initial legal moves to make to do this, perhaps they could secure themselves a good position for the time being, make some decent rent off the places and if they are (or I am) really savvy, they can do exactly what berettafan says - get people who will either default or not exercise their purchase options at the end of the contract term, ensuring they're always breaking even or coming out ahead on these places without the burden of conventional landlord/tenant crap to deal with.

I agree a lot of it might be betting on the market. The "best" position to be in (as a buyer anyway) would be to get in at a negotiated price & payment schedule for X months, then have the value go up, exercise the option to buy and immediately flip/dump it for a profit. Then you're sitting pretty on a nice pile of cash. Unfortunately I don't see a likely market for this happening for at least a few years - but I want to learn now so when it does come, if it makes sense to take a shot, I can.

The big question (either as a buyer or seller) concerns financing. Who sets up the financing? If you go to the end of the "rental" contract period and want to exercise the option, do you have to then come up with 20% down (on top of the who-knows-how-much-down you've already come up with to enter into the agreement in the first place) to a bank/lender to initiate a mortgage to buy? Or do you work this out with the owner's bank in the first place and get their "okay" to take over the note at the termination of the contract period if desired? Or is this simply a case-by-case point of discussion?

There's precious little information online about this.

[RANDY P]

You have to find the source to pay off the balance owed to the seller when you execute the purchase- you take out a loan assuming the value is there.

1- as far as present banking regulations go, it would be underwritten as a refinance so therefore there is no downpayment needed. The existing equity in the home would be the down. This is because you already live in the property and have been paying on it. If the house appraises for $400K and you owe the seller $300K then it would be as if you put $100K down.l

2- these guys are usually gambling on you willing to put down some extra money, and make ALL payments on time. if you blow it or fall behind they keep all the money, or worse it loses value then you're on the hook. Of course this can be negotiiated. I've seen some deals written in this manner. Pretty brutal.

3- these are typically for people who can't qualify for financing on their own. While you pay this you still count as a renter until you execute the contract so they still have to abide by landlord- tenant law (see attorney) until you finalize the transaction.

Be aware that some deeds / notes have a "due on sale" clause or some sort of acceleration if the property goes rental, so see the underlying loan documents and make sure you aren't going to get ousted if he queers it somehow - doesn't make the mortgage payments, the bank finds out it's a rental when it's supposed to be O/O or there's something in there that they f'd up - a prepayment penalty or the loan is an ARM that will adjust before your agreement expires. Make sure you have everything covered.

4- record the lease option to purchase, always pay with a personal check (NEVER CASH) and of course, never miss a payment. Save all records of payments, cancelled checks front and back as proof you have paid as agreed. Bank will require this- all copies of checks submitted for payment on the deal.

[turbo6bar]

PoP, you're talking about two different methods. One is buying via land contract (AKA installment sale). You have equitable title here, so you do have some position. He can't evict you. If you don't pay the 'mortgage,' he has to foreclose. You are basically signing a contract wherein the seller is the bank and you get the deed at the end of X payments. The term, interest rate, and closing costs are ALL negotiable. As mentioned before, installment sales can present tax advantages to the seller. On the other hand, the buyer gets to deduct the interest. A saavy seller may structure the land contract with favorable terms and interest such that the note can be resold on the private market. The seller gets a lump sum, and buyer of the note gets an income stream.

The other method you mention is a lease-option, rent-to-own, etc. This is basically renting, but you have the option to buy the home at the end of the option period. Generally, the seller and buyer/renter negotiate an option fee and the sales price. If the buyer does not exercise the option, the option fee is forfeited. In most cases, the buyer is responsible for securing financing. Lease-options were popular about 6-8 years ago, before the stupid lending became famous. A person with less-then-stellar credit would do the lease-option, have 1-3 years to straighten out credit, and then buy the home. Some lenders were very lenient, allowing a buyer/renter to "refinance" their lease-option. It was great if the house would appraise for more than purchase price.

Sorry for the rambling.

There is no perfect way to buy/sell. It all depends on the property, buyer, seller, and their goals.

[turbo6bar]

RANDY beat me.

One thing about the 'due on sale' clause-- some owners may try to do a wraparound mortgage. They are essentially taking a mortgage from you, along with your payments. Then, they pay their mortgage. The original mortgage supercedes your deal, so if the seller decides to stop paying their mortgage, the original lender can foreclose and you lose everything.

One forum you might want to check is creonline.com Dunno if it is crap these days, but it does cover some of the ins-and-outs.

[Porsche-O-Phile]

Thanks for the info guys - it's clear I have much more reading on this subject to do, but at least I feel like I'm pointed in the right direction.

This might make a lot of sense in the coming market as a "time buyer". Hmmm. . .

[m21sniper]

I know a few people that bought houses this way. While i don't know the specifics, they've spoken very positively about the experience, and recommended it highly if you don't have a spitload of money to put down.

None of these people are rocket scientists, but they are homeowners. YMMV.

[berettafan]

I'm not positive on this but i BELIEVE that installment sales pay the cap. gains rate in the year of receipt. In other words if Obama raises long term cap gains rates your parents could potentially pay a LOT more in tax with an installment sale.

Again, i'm not positive in my recollection but i believe that is the case.

And, as mentioned by turbo6, foreclosure is not necessarily something you want as part of your business plan. Between time/legal fees/lost rent it would take a considerable deposit to offset expenses.