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The Home Search

Rent-To-Own Homes: What Are They? And What Is A Lease Option?

Are you eager to buy a home but need some time to build up your savings and credit score? Eager to sell your home but not receiving any offers from qualified buyers?

A rent-to-own agreement – achieved by way of a lease option contract – can be the ticket to accomplishing your goals. Check out what’s involved and some of the pros and cons to see if this type of agreement might be right for you.

What Is Rent-To-Own?

Though the term “rent-to-own” might seem pretty self-explanatory at first glance, there’s a little more to it than you might expect.

Essentially, a rent-to-own agreement is an agreement between a tenant and a landlord wherein the landlord agrees to lease a property to a tenant for a certain period of time, after which the tenant can purchase the property.

Rent-to-own is often seen as a more affordable way into homeownership because the buyer avoids many of the high startup costs associated with purchasing a home. However, rent-to-own agreements come with their own costs, and potential renters should be sure they fully understand what a particular rent-to-own deal entails before signing the contract.

How Does Rent-To-Own Work?

Rent-to-own contracts often utilize what is known as a lease option agreement. A lease option is made up of two parts.

The first part is a standard lease, which means a tenant rents a home and pays monthly rent and expenses to a landlord. The second part is the “option,” which locks in certain terms that allow the tenant (home buyer) to buy the home from the landlord (home seller) when the lease term ends.

In some cases, the contract may state that, rather than having the option to purchase the home, the renter is obligated to purchase the home at the end of the leasing period. This is known as a lease purchase agreement.

Let’s take a look at some of the finer points of these types of contracts below.

The Lease Agreement

The first part of a rent-to-own contract, the lease agreement, is a contract between a lessor (landlord) and lessee (renter) that allows the lessee to use a property for a designated amount of time. This agreement does not provide any ownership rights to the lessee, and as with any lease contract, most points are negotiable.

While every contract is different, here are some things you can expect to see in every rent-to-own agreement.

The Lease Term

These types of leases are often set up to last one to three years. Buyers generally prefer longer terms – even as many as 5 years – because it gives them more time to strengthen their credit score and save for a down payment.

Rent

The contract will specify how much the tenant will pay in rent, when rent is due, what happens if rent is late and what percentage of the monthly rent payment will be credited toward the eventual home purchase.

With a rent-to-own home, tenants may pay a little bit more in rent than what is typical in the area, to account for the extra money that’s being set aside for their future purchase.

Repairs And Maintenance

In a traditional lease agreement, it’s usually the landlord who is responsible for property maintenance and making any necessary repairs that may come up over the course of the lease. This isn’t the case with most rent-to-own agreements.

With a lease option or lease purchase contract, it’s the tenant who is required to keep the home maintained, complete repairs and pay for any related costs that may come up.

Security Deposit

It’s important to decide upfront how security deposits will be used and returned at the end of the lease. At the end of the leasing period, this deposit can typically be returned to the tenant or credited toward their home purchase unless circumstances permit the landlord/seller to keep it.

The Option Agreement

This portion of the contract gives the tenant the right to purchase the rental property once the lease ends. As part of this agreement, the tenant/buyer and landlord/seller will negotiate and come to an agreement on a few vital points.

Purchase Price

The tenant and landlord can agree to a purchase price when they first enter the agreement or decide that the home will be priced at market value once the lease ends.

Often, tenants prefer locking in a price from the start since home prices generally go up. However, landlords will often bake a certain amount of appreciation into the price to make up for this.

The Option Fee

A rent-to-own agreement is going to cost more for a tenant than a traditional lease agreement. If the tenant wants the option to purchase the home once their lease is up, they’ll need to pay for that privilege. This is what’s known as the option fee.

Landlords will typically require an option fee equal to a certain percentage of the agreed-upon purchase price. Depending on the agreement, some of this money may be applied to the home purchase if the tenant exercises their option to buy.

Option fees are usually nonrefundable if a tenant decides not to purchase the home.

The Option Period

This is the time period when a tenant can exercise their option to buy the rent-to-own home. In some contracts, the tenant can do so at any time during the lease. In others, it must be at a date specified in the agreement. Once the option period passes, the option agreement is null and void, and the tenant typically forfeits the option fee to the landlord.

Keep in mind – if you’re a tenant debating whether to exercise your option, you should still use the same best practices as any home buyer. Just because you’re familiar with a home and have an arrangement with the home seller doesn’t mean you should cut corners or limit your options.

Is Rent-To-Own A Good Idea?

There are pros and cons to a lease option for both the seller (landlord) and potential buyer (tenant) of a house. Whichever side you’re on, it’s highly recommended that you hire a real estate attorney to draft the necessary documents and learn about your rights.

Pros

If you’re a home seller, offering a lease option allows you to expand your list of potential home buyers. Depending on the housing market in your area, it can sometimes be difficult to find qualified buyers. When you list your home as rent-to-own, those who want to buy a home but need more time to secure a mortgage or save for a down payment become potential buyers, so you can sell a home that you might not have been able to otherwise.

These agreements can also be financially beneficial for the seller because you’ll be able to collect rent from your tenant during the leasing period. Plus, rent-to-own tenants tend to be a bit more conscientious when it comes to caring for the property, as they plan to buy it at the end of their lease.

As a home buyer, the biggest advantage to rent-to-own is getting to move into a desirable home while getting some extra time to qualify for a mortgage or save for homeownership.

If the purchase price for the rent-to-own home is agreed upon up front in your lease option agreement, you can also save on the purchase price if the home appreciates in value by the time your lease ends.

Cons

If you’re the home seller, a lease option means that you’ll need to become a landlord. Though you might not have quite as many responsibilities as a traditional landlord, since rent-to-own contracts typically stipulate that the renter is responsible for things like repairs and maintenance, you’ll still need to take care of collecting rent and ensuring that you’re fulfilling all your contractual obligations.

Additionally, if the tenant walks away at the end of their lease, the seller must then invest more time, energy and money to try and sell the home all over again.

There are risks on the tenant’s side, too. If you’re a tenant who does not end up buying the home for whatever reason, you’ll likely forfeit your option fee and potentially other money you’ve put into the home as well.

It’s also possible that home values could go down. If you agreed to a purchase price when you first entered the contract and the home is worth less than that when it’s time for you to exercise your option to buy, you’ll either have to buy the home for more than it’s worth or walk away and lose money.

Another nightmare scenario: your landlord ends up in financial hot water and loses the house to foreclosure. In this situation, you could lose your money and your home though no fault of your own.

How To Find Rent-to-Own Homes

Many homes are designated as rent-to-own by owners and can be searched for directly online.

If you’re interested in a lease option to buy a home, you may need to seek out homeowners who have started renting out a property because they were unable to attract an offer at their asking price.

The Bottom Line

Sometimes it’s tough for buyers to find financing or for sellers to find buyers. A lease option can solve for both and is worth exploring if you’re stuck in real estate limbo.

Before you sign a rent-to-own agreement, however, remember that it’s essential to consult a qualified real estate attorney who can clarify the contract for you and help you understand anything that might be confusing.

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The Home Search

Risks and Benefits of Buying a Foreclosed Home or Short Sale

Buying a house in foreclosure or short sale can be challenging, but precautions, patience and smart choices can lead to significant advantages.

Buyers who are considering purchasing a foreclosed home or short sale property may get excited at the prospect of scoring a sale at below market value. But the opportunity doesn’t come without risks.

In the wake of the bust of the 2002 – 2007 real estate bubble, home prices started to decline. Owners with little equity soon found themselves owing more on their home loans than their houses were worth. This is known as being “underwater” on the loan, and it often leads to a foreclosure or short sale.

Foreclosure

If a homeowner just can’t afford the house, he may decide to relinquish ownership and give the house to the bank that holds the mortgage. This is called a Deed in Lieu of Foreclosure. Or, the foreclosure decision might be made for the homeowner when the bank initiates foreclosure proceedings.

Foreclosure is a lengthy and complex process. The lender must prove that it has accurate, complete paperwork supporting its right to claim the title. Homeowners often try to win loan modifications or other types of help to salvage the situation and stay in their homes. Related financial and legal problems, such as bankruptcy, multiply the complications – and the number of lawyers involved.

Houses in foreclosure look like bargains: typically they sell for 35% less than what they would have fetched if they were not in foreclosure. But financially distressed owners often let their properties fall into disrepair. Foreclosures can come with many hidden problems, from leaky basements to bills from homeowners’ associations to quarreling lenders. It takes a long time to sort out who is owed what, how they will be paid, and when the title will finally be cleared.

Things to consider:

•  You might want to order up a title search when you make your first offer so you don’t get surprised at the point of closing.
•  The title search might uncover nasty surprises, such as unpaid taxes.
•  Disputed title and loan paperwork might sink the deal.
•  You might have to pay a real estate lawyer to review documents several times.
•  Closing fees may be high due to the complicated paperwork.
•  The closing will probably be difficult to schedule, with multiple delays.

Short sale

When a lender agrees to take less than the mortgage owed, that transaction is known as a short sale. For example, a homeowner might have bought the house for $200,000, putting down 5% and carrying a mortgage of $190,000. If the market value of the house declines to $175,000, that homeowner has lost her down payment. On top of that, her $190,000 mortgage is now $15,000 more than the house is worth. She is underwater on the mortgage.

If the homeowner were to sell, she would have to bring $15,000 to the closing to make up the difference to the lender. But what if the lender is willing to share the losses with her? The homeowner might be able to persuade the lender to accept $175,000 at closing. She loses her $10,000 down payment and the lender writes off $15,000 of the loan. Doing so clears the title and makes the house available for a clean sale. That’s a short sale.

Short sales are easy to understand on paper but hard to accomplish in real life. It’s hard to get the ok from the lender to take a loss on the mortgage. The paperwork can drag on for months. Other liens – such as unpaid bills from contractors who helped get the house ready to sell — often pop up, further entangling the process.

Things to consider:

•  The process will be slow and unsteady, with many frustrating delays.
•  As a buyer, conduct a title search to verify all liens and mortgages against the property to avoid unnecessary risks or surprises like unpaid taxes.
•  It may be hard to find a real estate agent adept at navigating the process.
•  You may have to pay a real estate lawyer to review documents several times.

Is It Better to Buy a Foreclosed Home or Short Sale?

Both scenarios present an opportunity to obtain a property below the potential market value. Foreclosures can be as much as 10-20 below their potential value. However, they also tend to have the potential for more inspection issues than your average home because of extended vacancy, deferred maintenance associated with the foreclosure process.

Short sales are also often priced slightly below what the market may suggest (5-15%). This is intended and sometimes necessary to entice and keep a potential buyer who will be willing to wait through the short sale process (typically four to six months or more). Once you come to an agreement on price and terms, the seller then begins the negotiation process with the lender. This can be challenging as there is always the potential the sellers’ bank can counter on price, decline the seller request, or require terms and stipulations that the seller must agree to in order for the lien to be released.

Understanding a House Title, and How It Affects Your Foreclosed Home or Short Sale Purchase

Title is your ownership right to a property. When you close on a property, that ownership right is granted to you physically in the form of a deed. It’s like a receipt. It’s proof that the property is yours. In order to be able to sell or finance the property, you must have a clear title to it. That means you must be able to deliver title (ownership) of the property to a buyer or pledge it as collateral to a lender, free of any liens and encumbrances.

The priority of a lien is established by when it was imposed. For example, if you apply for a refinance mortgage in 2018, but a lien was placed on your property in 2015, that lien will have priority over the mortgage in the event of a foreclosure action. Mortgage lenders require that you are able to deliver clear title to the property as collateral for the new loan. That means all prior liens will need to be satisfied before you can close on the new mortgage.

When you buy a house with a loan, the lender has the right to claim the house if you stop paying. Most homeowners continue paying back their loans even if the value of the house has eroded. But some decide that they will not continue paying for a house that is worth less than they owe on it. Other complications could arise if someone must move for job, family or other reasons. No matter why the house is being sold, its title problems must be cleaned up so they are not inherited by the buyer.

In many cases, the history on a title that has changed hands through foreclosure or short sale can be messy. Under normal circumstances, the homeowner pays off the mortgage and the lender releases the title (the legalities of this vary by state). That might happen when the homeowner sells the house and repays the mortgage with the proceeds of the sale. Or, it could happen if the homeowner stays in the house for the duration of the mortgage and eventually makes that final mortgage payment.

But if the homeowner has taken out other loans collateralized by the house, such as a second mortgage, a home equity line of credit, or construction loans for remodeling, the lenders behind those loans also have claims on the house.

All of these claims against the house “cloud the title.” If you don’t repay these loans, the lenders will put a lien on the house. Only when the creditors are satisfied is the title cleared.

If you’re planning on buying a foreclosure or short sale, you should be aware of title issues that could remain unresolved and how you can safeguard against them. Just because the lender owns the property doesn’t mean their staff will have tidy records and be responsive when a sale is in process.

How Your Title Company Can Save You a Lot of Money In the Long Run

A title search researches the property’s history to see if there are any complications in its ownership. If the search comes up clean, the company performing the search writes a title insurance policy promising to cover the expenses of correcting any title problems discovered after the sale.

Without a title search, you may not become aware of any liens or encumbrances until after you’ve bought the house. Once it’s in your name, you become liable for any debts attached to the property. The title search protects you by uncovering such issues before you buy the house, and the policy protects your investment against any claims resulting from an issue that was missed in the search.

Where to Find Foreclosures and Short Sales

You can find foreclosure properties listed on a number of sites, including ForSaleByOwner.com, bank websites, Fannie Mae and Freddie Mac. Another option is to pay for a foreclosure-listing service. Although there’s a fee, this is a good way to get a comprehensive national listing.

You can also visit the local county recorder’s office and investigate pre-foreclosure notices or Notices of Default. These are the first legal steps that lenders will take before filing for foreclosure.

These notices show the property owner, contact information and the lender, along with other characteristics of the home. At this stage, the lender may be open to a short sale request – but the owner must make the request, not you.

One of the most convenient ways to find short sales as potential investments is to check the listings on Auction.com. Here, the initial work has been done for you. The lender has already accepted a short sale request — all that’s needed is a buyer. Property details and photos are available for buyers to review before choosing to place a bid.

Worth the Wait

The process of closing on a foreclosure or short sale can be slow and unsteady, with many frustrating delays. But with a bit of legwork and patience, and your due diligence with your title company, you may secure yourself substantial savings on your new home.

Be prepared and be flexible, because disputed title and loan paperwork could sink the deal. Your title search might uncover some nasty surprises, but it’s better to discover those issues before you’ve purchased the property. Let your title company deal with it so you don’t inherit those liens and encumbrances.

To learn more about what title insurance is and why it’s important, watch “What Is Title Insurance,” a cool explainer video designed to make understanding title insurance easy.

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Buy a House Other Products & Services The Home Search

5 Keys to Buying a Home Directly From a For Sale By Owner Seller [Infographic]

Buying a home directly from the seller — whether you use an agent or not — can be a very rewarding experience. Here are the steps to signing on the dotted line.

5 Keys to Buying a Home Directly From a For Sale By Owner Seller

To view, download and print 5 Keys to Buying a Home Directly From a For Sale By Owner Seller [Infographic] as a PDF, click here.

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The Home Search

Own or Rent? Shifting Equation

Meredith Carr and Vince Melamed of Brentwood are just the sort of couple real estate agents have always counted on to buy a home.

Melamed is a successful keyboardist and songwriter who wrote hits including Trisha Yearwood’s “Walkaway Joe,” and Carr is a freelance editor. They owned a home in Nashville, but when they moved to Los Angeles last year they decided they did not want to tie up their money in real estate, or be on the hook for home repairs and upkeep.

“I never want to let the mortgage stand in the way of a business decision,” Melamed said. “I don’t want to be in a position where I want to buy a piece of equipment but I can’t because all my money is tied up in the house.”

Carr and Melamed are part of what many economists see as a larger trend. Skittish after seeing home prices crater and eager to put money aside for a retirement that won’t include pensions, working-age people are increasingly skeptical about buying a home.

Surveys tend to support the premise. Two-thirds of Americans still see a home purchase as a safe investment, but that’s down from 83% in 2003, according to a study by Fannie Mae. Homeownership has fallen to 66.5% of the adult population, down from down 69.2% in 2004. A Harris Interactive polls says 70% of Americans aspire to homeownership, down from 77% a year ago.

The economic downturn and stricter mortgage standards are driving much of that decline, but economists say there’s also a growing belief among many that they can live better by renting rather than straining their finances to buy a house.

Adding to that is a sense among many younger adults that they will need to move for their careers, making them hesitant to buy lest they be forced to sell at a loss.

“We’re becoming more of a renting/sharing society,” said David Sleeth-Keppler, a psychologist who tracks consumer sentiment for Strategic Business Insights. “People are staying less bogged down, in case something bad happens.”

Real estate industry advocates contend that this is a passing phase, brought on by the plunge in home values from their peaks and the weak economic recovery.

People are still in a “financial fetal position,” said Rich Simonin, owner of Riverside-based Westcoe Realtors. “People who are nervous about jobs and money are still fence-sitting.”

Agents such as Simonin believe that attitudes will change as the economy improves, and that most Americans still want to own their home. Further, as more renters flood the market, rents will rise, eventually making homeownership more affordable than renting, according to Esmael Adibi of Chapman University.

The real estate website Trulia.com publishes a rent-vs.-buy formula showing that renting is the smarter choice right now in many cities, including Los Angeles, New York, Seattle and Kansas City.

There’s been a long-running debate over home purchases as an investment proposition. Many personal finance experts and investment advisors contend renting often makes more sense, strictly from a financial point of view.

“Homeownership is not right for everyone, nor has it ever been right for everyone,” said Gail Cunningham, a spokeswoman for the National Foundation for Credit Counseling. “That’s part of what got us into trouble — the idea that every American should own a home.”

Residential real estate had a rate of return of about 6% a year between 1978 and 2008, according to a study by economists Jack Clark Francis and Roger G. Ibbotson. The broad Standard and Poor’s 500 index of blue chip stocks, by comparison, had an annual return of 11%.

“Real estate does well in the long term, but it doesn’t do as well as the stock market,” said Ibbotson, a finance professor at Yale School of Management.

Real estate groups counter that owning a home essentially forces people to save, and the equity they build can be used to fund a wide range of expenses, from college tuition to retirement.

On the other hand, homeowners have to shell out thousands a year on upkeep, repairs and taxes. What’s more, many believe home prices will take years to regain their peaks. In Southern California, median home values fell again in January, to $270,000, down from $505,000 in July 2007.

“When you do the math on it, it’s not necessarily a great deal for everybody,” conceded Steve Sachse of Nova Real Estate Services in Dana Point. His clients used to scrape together the money for a down payment and assume their house would appreciate enough in value that they’d become rich. Now, many of them are renting instead.

What the real estate industry fears most is that people won’t buy again when the economy picks up, as some people assert.

When she was growing up, Lise Marken, 33, always presumed she would buy a house. Her great-grandfather bought property in Beverly Hills in the 1930s and her parents bought in the Westside in the 1980s.

Marken and her husband, a financial analyst, looked into buying a home when they moved to Los Angeles from Palo Alto in 2009. But after crunching the numbers, they estimated that a house wouldn’t gain enough in value to justify the investment.

Instead, they live in a luxury apartment building downtown with a pool, hot tub and workout room. “We think there are better things that we can do with our money,” said Marken, a graduate student. “It’s definitely a financial decision.”

Even if housing demand picks up, fewer Americans may be able to buy. Last week the Obama administration called for phasing out seized mortgage giants Fannie Mae and Freddie Mac and dramatically reducing the role of the government, which through all its entities now guarantees about 90% of all new mortgages.

If the plan goes forward, it probably will mean fewer people will qualify for loans, and those who do will have to pay higher interest rates.

That could have long-term consequences for the economy — especially in Southern California, which historically has been heavily dependent on the home-building industry and related jobs, including building and selling household goods such as furniture.

Still, many real estate agents and developers say it’s only a matter of time before things pick up again, pointing out that housing is a cyclical market. What’s more, they say, most people still prefer to own instead of rent.

“There’s a zillion reasons why people aren’t buying, but honestly, they would if they could,” said Jane Peters, a real estate agent in Beverly Hills.

As for Peters? She leases. Her rent is so low, she says, that buying just doesn’t make sense.

This story was first published on Feb. 19, 2011 in the Los Angeles Times. This article from Tribune Company news outlets has been republished for additional  education purposes.  Please note that this editorial content was produced by Tribune news staff who are not employed by ForSaleByOwner.com or  by Tribune Digital Marketplaces.  This article is not affiliated with any links or products that appear on the on the same pages.  Read more about our editorial policy.

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The Home Search

Live Where You Work

Teachers, firefighters, police, and other municipal staff are locally revered for what they do – teaching, protecting and saving lives. But often, they can’t afford to live in the communities they serve. House prices may be eroding, but so are earnings. Meanwhile, down-payment requirements have tightened.

The conundrum of “workforce housing” — that is, providing housing for municipal and middle class workers essential for community functioning – is being addressed by a number of programs.

South Carolina is showing the way with “Palmetto Heroes,” a workforce housing fund open not just to full-time teachers, police and firefighters, but also to volunteer firefighters and state correctional officers. Terry Puleo, a mortgage broker with My Mortgage Connection and a member of the ForSaleByOwner.com broker Pro network, explains below how this program works. Like many other state programs, it combines down payment assistance with low-interest loans. A national overview of state programs is provided in the “Tackling Workforce Housing State by State” report, which details dozens of local programs, many funded and supported by the real estate industry. If you’d like to track news about workforce housing programs, check out the resources at the Urban Land Institute’s J. Ronald Terwilliger Center for Workforce Housing.

The South Carolina Palmetto Heroes program leverages loan guarantees through the Federal Housing Authority (FHA) with a $40 million down payment fund, explains Puleo. Like many other workforce housing programs, homebuyers are expected to stay in their new houses for at least three years – thus fulfilling the neighborhood stabilization goal of the program.

But unlike others, South Carolina tiers the program by income. Lower income buyers might have their down payment loan of up to $7,000 forgiven if they stay in the house for at least five years. Meanwhile, higher income borrowers are expected to pay back the down payment loan, but not for the first three years of homeownership, and even then, the loan carries only a 4% rate.

“You don’t necessarily have to be a first-time buyer to get in on the Heroes program,” says Puleo, who is based in Greenville. “In some targeted counties, you can use the program as long as you don’t already own a house when you are buying your new one. In non-targeted counties, you can’t have owned a house in the past three years.”

Of course, like all lending programs, the exact terms are tailored to each borrower’s circumstances – family size, county, and other qualifications. Terry Puleo can answer questions about the Heroes program as well as other mortgage products. She can be reached at terry@thegreatestrates.com or (864)380-0443.

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The Home Search

Skip the Title Insurance! What’s the Worst That Can Happen?

Title insurance can seem like a necessary evil. What’s the worst that would happen if you didn’t bother with it?

The worst is pretty bad: you’d have paid for a property you can’t keep, because you can’t prove that you bought it legally.

Title problems erupt when numerous parties want to be repaid loans and bills collateralized by the same property. When you’ve got the lender that made the first mortgage; the lender that opened the home equity line of credit; contractors whose unpaid bills resulted in liens on the property; taxing districts; and even homeowners’ associations all lining up to be repaid from the proceeds of the house, it’s easy to see how they might not agree on who gets paid what, and when.

If you don’t bother with a title search, you buy all those problems along with the house. Just because you are the new owner doesn’t mean that the problems evaporate. You might have to sell the house just to repay the bills..which means that you have lost everything you put into the purchase.

A title search is required by all lenders. They want to make sure that title problems are cleared up before you buy the house. It’s not for you. It’s for them. If the lender makes a mortgage collateralized by a house that already has claims against it, that lender is going to lose that money.

Customarily, sellers pay for title insurance at closing. Recently, lenders have been requiring additional policies that protect their interest, and that policy is paid by the buyer at closing. Your lender is always covered by the title insurance policy you buy before closing. Make sure that the policy protects you, too.

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The Home Search

Rent or Buy? Five Tiebreaking Factors

Should you buy a house now or continue renting?

Here are five make-or-break considerations.

1. How long do you plan on living in the home? If you purchase a home and then get a job transfer or decide to move after only a short time, you may end up losing money because of the transaction costs. The value of your home may not have appreciated enough to cover the costs that you paid to buy the home and the costs that it would take you to sell your home.

The transaction cost — commisions and fees — plus the transition cost — moving, changing utilities, storage – could wipe out several years’ worth of hard-won equity.

Do this simple calculation to estimate the tradeoff.

Transaction cost + Transition costs = X

How many years will it take for your equity to be greater than X?

That is how long you must own to actually gain equity just on the cost of selling. Add in property taxes, improvements, and maintenance, then offset that with the value of the mortgage tax deduction, and you will soon have a true picture of how many years you must own the house to pull ahead of renting.

2. How long will the home meet your needs? What features do you rneed to meet your current and anticipated needs? Your household’s needs five years from now? Do you want to buy a house that fits your current needs exactly, or do you want to adapt or grow into the house as your needs change?

3. How is your financial health, including your credit?  Is now the right time financially for you to buy a home? Would you rate your financial picture as healthy? Is your credit good? If you don’t have a down payment of at least 10%, and if your credit is not stellar, lenders will make your rent-or-buy decision for you: No.

If you are eager to own, it’s worthwhile to have a heart-to-heart with a mortgage lender to scope out your financial situation, see what you must repair and save, and plot your strategy for qualifying for a market-rate mortgage.

To determine how much home you can afford, use a calculator at Bankrate.com. It will serve up a range of purchase prices likely to fit your financial situation.

A time-tested formula is the “28/36” rule, which means that your monthly housing costs can’t exceed 28 percent of your income and your total debt load can’t exceed 36 percent of your total monthly income. Depending on your assets, credit history, job potential and other factors, lenders can push the ratios up to 40-60% or higher. While we’re not advocating you purchase a home utilizing the higher ratios, its important for you to know your options.

4. Where will the money for the transaction and down payment come from? At the very least, you will need a 3% down payment to qualify for a government-guaranteed mortgage under a special program for certain regions, or for people in some circumstances, such as veterans. As well, you must prove that you are a good credit risk — in other words, that you will pay back the loan.

5. Do you have enough to cover emergencies and the ongoing costs of homeownership? The down payment is just the start. You must have several months’ worth of mortgage and property tax payments saved in case of unemployment, illness or income-interrupting emergency. You also need to have or start a savings fund for predictable expenses such as insurance, maintenance, repairs, and improvements. If you buy a condominium or a town home, in certain communities a monthly homeowner’s association fee might be required.

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The Home Search

Price Cuts Mount as Condos Linger in Chicago

A trio of condo developments — one small, one medium and one large — announced price cuts recently as the market readjusts in a post-tax credit market and lenders show their nervousness about the summer selling season.

Price cuts in Chicago’s condo market are nothing new, particularly downtown. Earlier this year, 565 Quincy, 200 North Dearborn, 222 E. Pearson and Metropolitan Tower all trimmed their advertised prices. Other buildings conducted auctions and then set new prices for the remaining units, based on the auctions.

The size and scope of the decreases, at Parkside of Old Town, The Columbian and Wabansia Row, vary. The constant, though, is lenders’ efforts to jump-start stalled sales in new buildings.

“Every development has a different circumstance, depending on if it has a lender that’s coming to reality,” said @Properties agent George Schultz. “Every development is financed a different way. But the bottom line is the downward pressure on new construction has come to bear.”

Developers and their bankers are hoping that as the economy slowly firms up, buyers will see the one-two combination of reduced prices and historically low mortgage interest rates as proof that it’s a better time to own than rent or to move up to a bigger, and now more affordable, home.

“The mentality of the buyer walking through my door now is different than a year ago,” said Matt Hollman, sales director at The Columbian. “A year ago they were all talking about how bad the market is. Now a third are talking about the bad market and two-thirds are saying it’s the right time to buy at the right price. They’re going to take the best deal.”

Three sets of recently released data aren’t likely to calm the nerves in sales centers. The first, from real estate site Trulia.com, calculated the price-to-rent ratio for major cities by comparing the average list price with the average rent on a two-bedroom apartment, condo and townhome. The Chicago area’s price-to-rent ratio was 15, meaning it just eked by as being a city where it’s less expensive to own a home than to rent. Had the ratio been 16, it would have been a better city for renters, depending on their situation.

Another piece of data, from a Campbell/Inside Mortgage Finance survey, found that nationally, home shopping activity nosedived in May, following the April 30 expiration of when buyers had to have sales contracts signed to qualify for a tax credit. Meanwhile, the U.S. Census Bureau reported that new home sales in May were down 32.7 percent from April and 18.3 percent lower than in May 2009.

Among the developments with recent price cuts is Parkside of Old Town, where prices were cut by up to 30 percent on 75 condos and up to 40 percent on 27 town homes. The development, on the site of the former Cabrini Green public housing complex, is one of the city’s Plan for Transformation communities and offers a mix of market-rate, affordable housing and units set aside for returning Chicago Housing Authority residents. It has been beset by slow sales and financing issues.

In Bucktown, Wabansia Row has dropped the price by up to $100,000 on 11 new town homes. At The Columbian, a 46-story condo tower that overlooks Grant Park and was taken over earlier this year by Fidelity Investments, prices on 20 of the remaining 60 unsold condos have been cut by an average of 25 percent.

Nevertheless, Hollman said it’s no fire sale of the project because the goal is to sell 20 units this year. It may not reassess the pricing structure on the other 40 units until next year.

Home shoppers may see more of that strategy, namely slashing prices on just enough units to pacify a project’s investors, as the year goes by. The reason behind it is the other reality of Chicago’s condo market. Anyone who wants a newly constructed condo next year is going to find them in short supply — and that will likely firm up prices.

Appraisal Research Counselors predicts that it will be at least two years and maybe more than three years before new development deals begin. In fact, the only project scheduled to deliver condos to the market in 2011 is the ultra-high-end Ritz Carlton Residences.

“This is a strategy that developers contemplate,” said Gail Lissner, a vice president at Appraisal Research Counselors. “They fully realize that there is going to be no more new product added to the market and next year we’ll have fewer units that are in competition.”

Adds Schultz of @Properties: “Everyone wants to hold out as long as they can.”

This story was first published on July 4, 2010 in the Chicago Tribune.

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The Home Search

New Florida Laws Can Make Renters Pay Homeowner Association Fees

Donna Collins, who pays rent on the Kissimmee home she shares with her elderly mom, faces a new threat of eviction starting next week when Florida law allows homeowner associations to pursue renters, not just landlords, for overdue fees.

If the owner falls behind and the renter doesn’t cover the deficit, the renter faces eviction under the new statute, which takes effect July 1.

“What it boils down to is that we’ve got the homeowner association on one side saying, ‘If you don’t pay us for the fees, we’re going to evict you,’ ” said Collins, whose landlord owes thousands in back fees. “And on the other side you’ve got a landlord saying, ‘If you don’t pay me the rent, then I’m going to evict you.’ What’s a tenant to do?”

The issue of delinquent homeowner fees has become pervasive in Metro Orlando, which led the nation in rental and homeowner vacancies during the first quarter, according to U.S. census figures. The census reported that 8.9 percent of all homes and condos were unoccupied and 20.6 percent of all rentals were empty — the highest vacancy rates among the nation’s 75 largest metro areas.

In the past, tenants paid only rent to their landlords, who were supposed to pay any community fees associated with the house or condo unit. If a landlord failed to pay the fees, a homeowner or condo association could file a lien or ask a judge for title to the property. But both options took time and came with legal fees that were tough for cash-starved associations to pay.

The new law allows associations to collect fees directly from renters if the owner-landlords don’t pay up.

“I feel bad for the tenants. They’re being put in the middle of the situation,” said Frayda Morris, owner Central Association Management of Kissimmee, which has sent notices to Collins and other renters. “But the big picture is that they are in the home paying rent, and the investor, he’s collecting rent but he’s not paying assessments, not paying the mortgage.”

Collins said her adult son, who also lives with her, was renting in Tampa but was booted from his home when the bank foreclosed on it. So before renting the Kissimmee house, she said, they checked with the property-management company that was showing the rental to make sure the owner wasn’t late on association payments.

But after signing the lease, they discovered that the property was headed to foreclosure. And now Collins has learned that her landlord wasn’t paying the association fees either.

Investor-owners whose reaction to the housing slump has been a “strategic default” — walking away from the mortgage on a devalued home or condo even though they can afford to pay — also stop paying their association fees. That trend, combined with an increase in the number of unemployed residents who can’t afford fees, have made it difficult for homeowner and condo associations to maintain pools, roofs and sidewalks. And the resident-owners who continue to pay resent covering for absentee owners who don’t.

“What we get is: ‘Why do we have to pay for people who don’t pay?’ ” said Morris, who has worked in property management for 29 years.

The new law may ease financial problems for homeowner and condo associations, but questions remain about how it will be put into effect.

For starters, it’s not entirely clear how much of a rental’s delinquent-fee bill a tenant will be expected to pay, said David Muller, a Sarasota lawyer who specializes in association law.

And many associations may have trouble assessing tenants, Muller said, because no one necessarily tracks which properties in a community or complex are rentals, who is renting them and how much they are paying.

“There are some questions about exactly how this is going to work,” he said. “The good news about this is that it’s going to give associations another mechanism to get paid on these unpaid assessments. But it does provide a host of questions, with issues not addressed in the statutes, and it will invariably be challenged in the courts.”

One of legislation’s co-authors, state Sen. Jeremy Ring, D-Margate, said the law was intended to ensure that everyone pays a fair share. He noted that renters have always faced eviction when their landlords fail to pay fees or mortgages; this measure just makes the system more efficient by giving associations an option other than filing a lien or going to court.

“If a renter isn’t paying their maintenance fees, they should be offered no protections because they’re harming every unit owner,” Ring said Thursday.

In terms of actually putting the law to work, Ring said the measure was “admittedly gray” in determining how much renters should owe of the back fees that accrue while they are living in a particular house or condo. He said that “loophole” may need to be addressed by the courts.

Collins said she likes the layout of the four-bedroom house she’s renting and has even tried to buy it from the owner. So far, that hasn’t happened.

And now, she said, the owner has made it clear that he’ll move to evict her if she pays the association fee instead of his rent.

This story was first published by the Orlando Sentinel on June 28, 2010.

Categories
The Home Search

Florida Passes Association Reform

Wendy Murray isn’t betting Florida’s recently passed condominium and homeowners association reform law will single-handedly clean up the economic crisis the state’s shared communities are facing. But Murray, president of her neighborhood HOA, hopes positive change has begun.

“The condo bill is not all-solving,” said Murray, president of the Villages of Renaissance Master Association. “However, it is better than nothing, which is what we received last year,” she added, referring to a similar sweeping Florida reform bill that previously failed to garner Gov. Charlie Crist’s signature.

Crist signed the bill last week. (Note: The first week of June, 2010.)

“Most of the changes help condominium associations,” Murray said, citing new obligations placed on banks to possibly pay higher maintenance fee amounts for units in which title was taken through foreclosure. “However, HOAs were afforded the ability to lien for fines of $1,000 or more,” Murray said, adding that she believes it provides the association a big stick when dealing with owners who fail to follow HOA rules.

Still, some owners and board members like Richard S. Herman say the Legislature should have paid more attention to owners who owe much more on their mortgage loans than their properties are now worth, thanks to South Florida’s depressed real estate market.

“My concern is that these bills nibble at solutions without looking at truly solving issues,” said Herman, a board member of the umbrella group Alliance of Delray Residential Associations, which represents local homeowner and condo associations. “The new bill does not clean up the financial crisis. It does not address the critical issue of underwater mortgage.

“When the ‘bubble’ burst and people could no longer meet their mortgage obligations, they just walked away. In the case of condominiums, the association still had contracts for services and maintenance and had recreation property that had to be kept up. There is now no income to the association for those abandoned units causing the remaining units to pay the entire burden.”

In the coming weeks and months, there will be plenty for advocates and critics to argue about regarding the 103-page bill.

Highlights of the law:

Sprinklers: Alters current state mandates that require condo associations to retrofit fire sprinklers by 2014 and allow associations to opt out of the mandates with a majority membership vote. The measure also will allow an association to vote to postpone action again every five years.

Bulk buyers: Current Florida law deems anyone who purchases more than seven units in a condominium of 70 units or more — or more than five in a condominium with less than 70 units — a “developer.” As such, they take on the same legal and financial responsibilities reserved for developers who build condominiums, including being on the hook for construction warranties. The new law eliminates the developer title for bulk buyers.

Lender laws: Requires lenders to pay 12 months worth of back fees — or 1 percent of the mortgage value — when they take title to a property through foreclosure or deed in lieu of foreclosure. Banks and lenders previously were required to pay up to six months of fees.

Rent collections: Will allow associations to directly collect rent from tenants living in units of delinquent owners, something that now requires a court order called a blanket receivership.

Insurance requirements: Will remove confusing provisions regarding individual unit policies, including those that provide associations the authority to purchase a policy on the behalf of an owner without insurance and requirements that association be named an additional insured/loss payee on a unit owner’s policy.

Delinquent owners: Condo owners behind in maintenance fees 90 days or more may now be banned from non-essential common areas, including community pools and club houses. Delinquent owners will also be disqualified from board elections or voting on matters that requirement a membership vote.

HOA fines: The new law provides homeowner associations the right to place a lien on a home when an owner faces fines in excess of $1,000. Such liens are not allowed for condo associations.

Board elections: Florida law requires association board candidates to sign a state form certifying they have read all condo laws. The law now will require such forms to be signed only by winning candidates after an election.

This article was originally published in the South Florida Sun-Sentinel on June 8, 2010. Daniel Vasquez is the Sun-Sentinel condo columnist.