Rent-to-own or lease option to purchase are creative strategies to purchase a home. You should seek legal advice from a qualified real estate attorney before considering this type of transaction. Below is a list of tips and items to consider, but should not be considered legal advice, as I am not an attorney. I would recommend learning as much as possible about this type of transaction, so you and your real estate attorney come up with a strategy that works for you.
- Budget
If you are deciding to rent-to-own, aka lease option to buy, then you and your family, if applicable, should come up with a family budget. Try to input all the monthly expenses: i.e. credit cards, utilities, gas/oil, student loans, taxes, insurance, groceries, car payment, etc. Email me for a copy of the spreadsheet that my family uses.After you complete your family budget, click here to access the Mass Housing affordability calculator. This should give you a good idea of what you can afford.
- Financing
One of the first steps should be to talk to a bank or mortgage broker to find out what you can afford. The goal is to walk away with a pre-approval letter. Next, plug the estimated mortgage payment, taxes and insurance into your budget to confirm you can afford the home. FHA is a great resource of information, as well as a potential option to finance your home. Click here for the FHA loan checklist. Email me for a contact list or search the web for a list of mortgage brokers and banks that you would like to interview. Be careful of web based lenders, not all are bad, but you definitely want to do your homework. I would recommend digging up 7 to 10 lenders. Visit your local banks, regional and national banks should be considered as well. Mortgage brokers have access to a wide variety of lenders, so if your credit is not pristine—not to worry—mortgage brokers may have a solution for you.
Now, you can begin to analyze the different mortgages and lease options to find the best value and maximum protection. This is a time to quiz your real estate broker to see what strategies s/he recommend. There are several strategies, so review all of the potential options. For example, a buyer could offer a seller a $1 or $10,000 option money. The buyer could offer could base the price on current market value or market value when the option is exercised. Terms of the option agreement could be 6 months or 2 years. Remember, in most cases, the option money is non-refundable. There are many ways to structure these deals, so analyze your options, review them with your real estate attorney and broker to decide the best strategy.
Find out from lenders when you can expect to qualify for a mortgage, so you can determine how long you will need to rent/lease. Email me for a copy of a spreadsheet to analyze the different quotes.
- Research the Market
Find a real estate pro that has experience working with buyers in your area. Review your budget to ensure you are looking at homes that you can afford, while considering the number of bed and bathrooms you need. The real estate broker will have access to properties on the market that fit your criteria, and may be able to find a motivated seller that would consider a lease option to buy. Homes that have been on the market for awhile are good candidates for this type of transaction. - Negotiate the transaction
Again, I would recommend hiring a real estate attorney to help you with the contract and negotiation. I have heard nightmare stories about family attorney’s, so I would recommend an attorney that specializes in real estate. In conjunction with your real estate broker, the real estate attorney can help structure the deal to protect you. Remember, real estate brokers and agents are not permitted to give legal advice.As mentioned before, there are several ways to structure these deals, so figure out what is best for you while considering your real estate brokers advice, and more importantly your real estate attorney's legal counsel. For example, if you are going to rent for a year, then you want a portion of your rent to go towards the purchase price. These are items that your real estate attorney should structure into the deal.
- Due Diligence
Below is a list of items to cover with your real estate broker & attorney:
- Seller disclosures (i.e. lead based paint)
- Review title policy
- Home inspection
- Home appraisal
Courteous of Novel Realty, http://novelrealty.wordpress.com/.
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