At Last, The Secrets of Rent-to-Own Homes

At Last The Secrets of Rent-to-Own Homes- 150x150The real estate market has several solutions for both home buyers and home sellers. One solution for those who wish to buy a home, but don’t have the money for such a large purchase yet, is renting-to-own, also known as a lease option. People who choose this option will pay rent for the home that they live in, but are given the possibility of purchasing the home at a later date. The rent that people who choose the lease option will have to pay is higher than a regular rent, but the advantage is that part of the rent will be credited to the buyer if he or she decides to purchase the home.

A rent-to-own agreement allows the buyer to purchase the home that he is currently renting at any time before the agreement expires. The length of time in which the home can be purchased can be a few months or even years. Because the rent is higher than usual, sellers can afford to take their property off the market and rent it. However, if the renter decides to buy the property, he or she will be credited with a portion of the rent. This sum of money can be put toward a down payment and closing fees, or simply used for something else. If the buyer is unable to or decides not to buy the property during the lease option period, the entire amount that was paid as rent over the past months or years will remain with the seller.

Advantages and Disadvantages of Rent-to-Own Homes

The rent-to-own option is advantageous to sellers because it gives them an alternative to lowering the price of a home that they are having problems selling. By making a rent-to-own agreement with a buyer, sellers know exactly how much money they will be making if the buyer decides to go ahead and make the purchase. If home prices go down during the lease option period, the asking price for the seller’s home will remain unchanged, and the buyer might still want to buy the property because he or she has already invested money in it by paying a higher rent. The seller is also at an advantage because the rent money can be used to pay the mortgage, property taxes and insurance. Also, a renter who signs a rent-to-own agreement will most likely take better care of the property, because they are planning on buying it in the near future.

Buyers are advantaged by the rent-to-own option because it allows them to buy a home if they don’t have the money for the down payment, or their income is not sufficient. If a buyer believes that his or her income will increase in the near future, renting-to-own allows them to have a roof over their heads while having the option of buying the home at a later date, when their financial situation improves. Buyers are also protected from a home price increase during the lease option period, because the price of the home will be locked in.

Buyers also have almost all the advantages that regular renters have, like not having to worry about repairs, property taxes, and homeowners insurance. Another advantage of renting-to-own that the buyer has is that, by living in the home for a long period of time, he can find out if there is anything wrong with it. If buyers decide to walk away from the deal, they only lose the extra amount of money that they paid over regular rent, but if they decide to buy the home, they will be credited with a portion of the rent that they paid.

Like everything in the real estate world, renting-to-own also has its disadvantages. Most disadvantages are things that could go wrong with the rent-to-own agreement. Here’s what you should keep in mind and look out for:

  • The seller’s financial situation. Try to find out if the seller is in any financial trouble. Red flags can be spots on his credit report, phone calls from debt collectors, or letters sent to the house. If the seller is in trouble, he can lose the home while you are still renting it. Meaning that you will lose the extra money paid as rent and you will have to find a new place to live.
  • Repairs and maintenance. The rent-to-own agreement between you and the seller should clearly mention which party is responsible in case of damage to the property, and who is responsible with maintaining the property. During the renting period, you should have the same rights as any renter, meaning that the owner should take care of repairs and maintenance.
  • The end of the rent-to-own period. If home prices have increased, the seller might not want to sell anymore. Unless you have the money to hire a lawyer and sue the seller, there is little you can do, so this is one of the risks that you are taking when renting-to-own. Also, if home prices go down and you want to buy the home, you will still have to pay the price that you and the seller agreed upon.

Renting-to-own is a good alternative for home buyers who expect their financial situation to improve in the near future, but not such a good option for those who are unsure of their income in the following months or years. Renting and saving money for the down payment can be a better choice than paying more for rent than having to abandon a home because you don’t have enough money to buy it.

Part 1: How to Procure Financing for Investment Properties

Part 1-How to Procure Financing for Investment Properties- 150x150

Question: How do I go about procuring financing for investment properties? What is a checklist of things that I need to have in order to get approved? 

Answer: One factor that kills the dreams of many potential real estate investors is lack of financing. Since lenders have requirements that borrowers ought to meet based on risk, it is important to prepare with the “risk factor” in mind. Below are some tips that can help                                                                        you to obtain funding from a lender:

Financing Tips for Investment Properties

  1. Check your credit report. Acquaint yourself with your credit report and get to know how it works. If you don’t have it, get it from free of charge. Review your report carefully for any errors because they can affect your score negatively. However, note that fixing errors will take some time.
  2. Don’t procrastinate. Fear and hearing about your friends’ negative experiences may discourage you from making a move. Procrastination may lead to regret and lost opportunities. Don’t hesitate to start looking around for a loan- you never know what good deals you might find!
  3. Have access to a regular source of income. Many applicants are declined because they don’t have a regular source of income. When lenders learn that you don’t have a regular source of income, they often shy away because of the perceived higher risk of default in repayments. Teaming up with a partner’s income will increase the chances of getting a loan.
  4. Shop for the right lender. Shop around for the best lender who can meet your needs comfortably. It may be beneficial to ask for advice and recommendations on the internet or from family members, acquaintances, bankers, and financial consultants.
  5. Have all the documents. Check with your lender or the lender’s website in advance in order to find out what documents are required. Some lenders may see your organization as a great quality to have in a loan recipient and decide to make you a loan offer. Having everything ready for your lender will streamline the process and make it easier for both of you. Among the documents required for getting a loan are bank statements, tax returns, pay stubs and W-2 statements. Lenders will also like to see your business proposal and business plan in order to establish the profitability from your real estate investment.
  6. Be informed. Knowledge is power. Adequate preparation by asking the lender questions will help you land a deal. Be confident and forthcoming as you supply answers to the questions that the lender will ask you. The lender will want to know what loan amount you are seeking, what your plans are with the loan, how you intend to repay the loan, and what your backup plan is if you do not receive the loan.
  7. Have a referral. All banks are working hard to manage customers’ default risk. If you are able, find a current customer of the the lender and have them refer you to increase your chances of receiving a loan offer.
  8. Discuss business risks with your lender. It is a fact that all businesses have an element of risk. One thing that all lenders will want to know is how you intend to manage particular risks facing real estate business. It is important to discuss all of these risks with the lender. Don’t forget that your lender may ask you how you will manage the risk of over-ambition and too much perceived success.
  9. Apply for the loan. If you are applying for your first loan, it may be more difficult to get approved compared to if it was your second loan. Many lenders prefer giving loans to lenders who have a good credit history. Once you have officially applied, all you can do is wait to see if you’re approved!

These tips should be very helpful for you if you are interested in obtaining financing for investment properties. Be sure to look out for the next article where we answer the second part of this question, “What type of lender should I target?”.

Financing Difficulties for Second Homes and Vacation Homes

Difficulties in Financing for Second Homes and Vacation Homes- 150x150Question: I work in a second home/vacation home market, and a lot of my customers have a hard time getting financed, even if they have very strong credit and assets. Some of my most common questions/roadblocks:

1. Does it really matter if it is a house or a condo? Why?
2. Why do I have to make such a big down payment? I only had to pay 20% down on my home in (some other state).
3. What’s the difference between an investment property and a                                                                       second home? What differences should I expect for each?
                                                          4. How will my insurance requirements be different for a                                                                                     vacation/second home vs. primary residence?

Answer: There are many factors to consider as a buyer when wanting to purchase a second property. Banks take on significant risk with customers that have two mortgages, so it will be more difficult for a home owner to obtain a second mortgage. We will go through and analyze each aspect of this situation so you are as informed as possible before attempting to purchase another place of residence.

Qualifications for a Second Home Mortgage

Many lenders have watertight requirements on second mortgage applicants. These are some of the requirements that need to be met:

(a) Location from the borrower’s principal residence- It is required that there is a reasonable distance between the location of the second home and the principal home. If the second home is located on a beach that is less than an hour’s drive away, then you will be granted a second mortgage. However, if it is farther inland, then the primary home must be located more than one hour’s drive away from the second/vacation home. The general distance accepted is at least 50 miles away.
(b) Must be occupied for some portion of the year- Lenders require that the second home be occupied for some portion of the year. Depending on the location of the home, this can be done seasonally or several times during the year. For properties located in a ski or beach area this can be seasonal. If it’s a lake house then you should make several visits there. The property must remain suitable for occupancy at any time during the year.
(c) Only one-unit properties can be financed- For purposes of a second home, only a one-unit property can qualify. Duplexes or multi-unit properties are considered to be investments by lenders. A condo is one of the houses that can qualify for a second mortgage.
(d) The property must not be rented out- Being your home, the lender is strict to ensure that you don’t rent it out or subject the property to a timeshare arrangement. The borrower must have exclusive control over the property. Agreements with property management firms to take control of the property are also not allowed.

Buying a Second Home

There are several options for purchasing a second home. These include:

(a) Cash- According to the National Association of Realtors, 36 percent of all home buyers in 2010 paid for their houses in cash. This is the best option, but the majority of people are unable to save enough money to purchase a home in cash.
(b) Conventional loan- This is the most common option that many borrowers tend to choose. Borrowers must be prepared to make a larger down payment (more than the usual 20 percent for the primary mortgage) for the loan to be processed. You will also pay interest at a higher rate and meet other tighter requirements compared to those of a primary mortgage. For a second home guaranteed by Freddie Mac or Fannie Mae, the down payment is 20 percent. However, the rate is higher for individual lenders, usually 30 or 35 percent. This rate is higher because lenders argue that a borrower has two loans and the risk of defaulting is high.
(c) Home equity loan- If a homeowner has substantial equity in their home, then a home equity loan becomes the best option. It’s only unfortunate that many homeowners have lost equity in their homes because the value of homes has drastically dropped in the market during recent years. Additionally, many lenders fear that if a homeowner bumps into financial difficulties then they will prefer to clear their primary mortgages in preference to second home mortgages.

Investment Properties and Second Homes: The Difference

Many people tend to use the terms “second home” and “investment property” interchangeably in an attempt to describe property that does not qualify as a primary residence. However, there are a number of differences between investment property and a second home.

Investment Property

Investment property can be defined as property that is purchased or acquired for purposes of generating income, taking advantage of particular tax benefits, or enjoying profit from appreciation. If you purchase property that will be used to make some gains instead of being your residence, then it is legally defined as investment property. It must not be your primary residence.

Different types of investment property include commercial property, residential rental property, and property purchased with an intention to resell.

In comparison with primary and second homes, loans for investment property are charged a higher interest rate. A larger down payment must also be made.

Second Home

A second home is defined as property that becomes your residence in addition to the primary residence you have already. In simpler terms, it is a vacation home that you visit occasionally.

Several conditions must be met if a property is to be allotted the name ‘second home’. They are referred to as the Second Home Rider. The conditions include:

  • Property must always be kept available for owner’s exclusive use and enjoyment whenever they wish
  • Borrower is the only occupant of the property, being the secondary residence
  • Property cannot be subjected to any agreements that need the owner to rent it or pass the rights to a property management firm
  • Property should never be subject to a rental pool or timesharing arrangement

A second home mortgage usually has a lower interest rate than an investment property loan. It may also have a lower down payment especially if it is approved by Fannie Mae or Freddie Mac.

Insurance Requirements for Different Places of Residence

Insurance coverage protects your home from storm damage, lightning, burglary, fire, vandalism and other perils. It may also include some minor cover for risks from accidents such as a dog bite, a slip-and-fall accident, or an injury as a result of an accident on the property itself.

Depending on the location and the weather conditions in the area where your second home is located, getting insurance coverage can be difficult. For instance, you will need to get a flood insurance cover for your second home because it is not covered in the standard insurance policy for a second home. If the home is located in a forested area, then installing a fire-prevention system will reduce the overall cost. Earthquake insurance is usually not covered and you will have to purchase this independently.

Second home insurance is generally higher than primary home insurance because it is more susceptible to burglars as a result of your absence many times during the year. Damages caused by storms may also be common because you are not always around to fix the house. Taking steps to keep your second home secured and maintained can save you more than 20 percent of the insurance cover.

The following tips can help you to keep the insurance cost lower:

  • Taking a nonsmoking discount if you are not a smoker (reduces risk of a fire) or a loyal customer discount
  • Taking discounts for an up-to-date second home that is fitted with the latest electrical systems, plumbing and the overall structure
  • Taking safety discounts for a second home with a security system, especially with an independent security agency
  • Taking a multi-policy discount for a homeowner that bundles their home and car insurance to one insurer

With all of this information, you should now feel confident and informed going into the process of purchasing a second home.