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In a tough market, it has advantages for both buyers and sellers  
by Phoebe Chongchua
 

Lease-To-Buy May Be Good Option

Many people who are struggling to get mortgages are finding comfort in a growing trend: lease-options. This is a contract that allows renters to lease the property and, at the end of their lease, they have the option to buy the home.

Hopeful buyers with poor credit are finding the rent-to-own option creates an opportunity to repair their credit while positioning them for homeownership. It's a win-win situation. Sellers find that properties that once sat vacant now offer cash flow.

The concept, while not new, is gaining momentum. There are a number of reasons buyers are finding this option appealing and it's not just because of bad credit. Some buyers are not sure if they're ready to own a home and take on all the responsibilities and extra costs that go with homeownership; the lease-purchase contract gives the buyers a chance to give homeownership a test drive.

Individual sellers in the housing resale market are considering this method to help get their homes sold and so, too, are developers who have found they're loaded up on properties they can't sell.

"In Boston, as is true with so of much the country, the condominium market is a little bit soft right now," says Eric Gedstad, Corporate Communications Manager, MassHousing in Boston.

So, some developers are trying the rent-to-own program in hope of getting condos sold. "There is one development where the renters sign an agreement that says 'If they would like to purchase the unit that they are renting any time within the next year, they can do so for a fixed price and they would have first dibs on that," says Gedstad.

Understanding the lease-option is very important. There are various differences in the way this type of contract can be drafted, so it is critical to hire experts to help negotiate the process to make sure you understand the terms and are protected. Here is some basic information about leasing with the option to buy a property.

Typically, in return for the landlord/seller extending the offer to buy the property after a period of time (usually one to three years) at a predetermined price, the tenant/buyer has to pay an upfront option (fee). That fee is generally non-refundable. A portion of the monthly rent may be applied toward the down payment to purchase the home.
 

Advantages for the buyer/tenant:

  •     Under this type of lease-option contract, for the period stated, you are the only one who has the option to buy the property.

  •     Typically a portion of your rent goes toward building equity and, when you purchase the home, is applied toward the down payment.

  •     You have a contract to buy the home when the lease is up.

  •     Usually you can buy the home at any time during the contract.

  •     You can see if homeownership is right for you by testing it out.

  •     In an appreciating market, you may get a good deal if the home goes up in value and you have already locked in a specific sale price for the home that is less than how much it appreciates. However, the reverse is true too. You could end up paying more for the home later on if it depreciates and a set price was locked in for a higher amount than what the home is worth when your lease-option is up.

  •     You have a chance to clean up your credit and build equity.

Advantages for the seller/landlord:

  •     Immediate cash flow from the tenant and the opportunity to sell your property later on.

  •     If the tenant/buyer doesn't buy your property, you keep the upfront fee (option money).

  •     You may have a larger pool to market your home to because you are marketing to traditional buyers and also renters and investors.

  •     You will likely get higher-quality tenants who take better care of the home since the tenants may want to buy it in the future.

  •     Since you own the home, you retain tax-shelter benefits while you have tenants in the home.

  •     You may get some peace of mind knowing that you have tenants in your home who are working toward buying the home.

Things to consider when utilizing a lease-option:

  •     Do a home inspection and document necessary repairs. Take photos to document the condition of the home.

  •     Make sure all payments are kept up such as mortgage, taxes, and insurance for the property.

  •     Verify if there are any liens against the property.

  •     Spell out the terms if the tenant/buyer does not exercise the option to buy the home at the end of the lease.

  •     Specify everything in writing; option contracts must have all the specific information that a sales contract would have in order to be enforceable.

  •     Prepare a draft of an undated and unsigned purchase agreement.

It's always a good idea, when purchasing real estate, to contact experts to assist you through the process to ensure that you understand the contract and ultimately complete a successful transaction.

Opportunity of a Lifetime for First-Time Buyers

 

For aspiring home owners who find their goal stubbornly elusive, newly enacted legislation providing a tax credit of as much as $7,500 for first-time home buyers might just be the opportunity of a lifetime.

But like so many of the good things in life, time is of the essence for buyers who want to take advantage of this outstanding opportunity. Only homes purchased on or after April 9, 2008 and before July 1, 2009 are eligible.

 


 First-Time Home Buyer Tax Credit at a Glance

?   The tax credit is available for first-time home buyers only.

?   The maximum credit amount is $7,500.

?   The credit is available for homes purchased on or after April 9, 2008 and before July 1, 2009.

?   Single taxpayers with incomes up to $75,000 and married couples with incomes up to $150,000 qualify for the full tax credit.

?   The tax credit works like an interest-free loan and must be repaid over a 15-year period.

Below is a more detailed look at the Housing Bill:

Landmark Housing Bill Awaits Signature of President Bush

Culminating months of intensive advocacy efforts by the entire National Association of Home Builders (NAHB) federation, the Senate has approved a major housing stimulus package that will go to the President?s desk to be signed into law shortly.

?This landmark bill contains several provisions to help home buyers, stop the slide in home prices, provide a lifeline to borrowers facing foreclosure, improve mortgage liquidity and bolster confidence in Fannie Mae and Freddie Mac,? said NAHB President Sandy Dunn. ?We commend Congress for working in a bipartisan fashion to provide much-needed relief to the American people.?

For the past year, NAHB has been in the forefront in pushing for legislation to address the turmoil in the financial and housing markets and to bolster the nation?s faltering economy.

Senate Banking Committee Chairman Chris Dodd (D-Conn.), a chief architect of the bill, calls it ?the most important piece of housing legislation in a generation.?

Echoing those comments, House Speaker Nancy Pelosi (D-Calif.) said that the bill ?represents the most far-reaching reform of our nation?s housing finance system in a generation.?

H.R. 3221, the Housing and Economic Recovery Act of 2008, includes several provisions aimed at ending the current cyclical downturn in the housing industry and strengthening the housing finance system so that it will provide critical support as the marketplace gains strength.

The House on July 23 approved the legislation by a vote of 272 to 152, sending the measure back to the Senate where Majority Leader Harry Reid (D-Nev.) shortly thereafter attempted to bring the bill up for immediate consideration through a unanimous consent agreement.

Reid?s effort was thwarted by Sen. Jim DeMint (R-S.C.), a long-time opponent of the bill, who used parliamentary maneuvers to delay a final vote on the bill until the Senate approved the measure by a solid bipartisan vote of 72 to 13.

The key elements of the bill are:

  • A temporary first-time home buyer tax credit. The tax credit will stimulate home buying, reduce excess supply in housing markets and shore up home prices.

  • FHA modernization. A revitalized FHA will have a greater flexibility to respond to the needs of borrowers, enable more working families to become home owners and play an important role in mortgage markets. To address the foreclosure crisis, the FHA will guarantee up to $300 billion to refinance troubled mortgages with federal insurance.

  • GSE (Government-Sponsored Enterprise) reform. The law reforms the regulation of Fannie Mae and Freddie Mac and permanently increases the conforming loan limit to help buyers in high-cost markets. To reassure financial and global markets, the government will temporarily expand its line of credit to Fannie and Freddie and permit the U.S. Treasury to purchase an equity stake in the companies through the end of 2009.

  • Mortgage Revenue Bond Program. The measure gives states the ability to issue an additional $11 billion in mortgage revenue bonds, which will help strapped borrowers seeking to refinance their home loans.

  • Low Income Housing Tax Credit. Enhancing this program will expand the supply of much-needed affordable rental housing.


Tax Credit Centerpiece of Housing Bill

The centerpiece of the housing bill is a temporary, $7,500 first-time home buyer tax credit for the purchase of any home. The tax credit can be used for a home sale closing on or after April 9, 2008 and before July 1, 2009. It is expected to provide a significant financial incentive for home buyers.

?The tax credit is the best stimulative measure,? said Dunn. ?It will increase housing demand, get home buyers back into the marketplace and fight falling home prices, which threaten the economy as a whole.?

As first drafted, the tax credit was set to expire on April 1, 2009. At NAHB?s urging, Congress extended the expiration date through June 2009.

?Extending the credit an additional 90 days was important so that home buyers would have use of the credit during the critical 2009 spring and early summer buying season, when we believe the bulk of home purchases will occur,? said Dunn.

Once President Bush signs the legislation into law, NAHB will launch a new Web site ? www.federalhousingtaxcredit.com ? which includes a set of comprehensive questions and answers about how the credit works and how consumers can put it to their advantage.

Further resources to help NAHB members promote consumer awareness about the credit will also be available at www.nahb.org/mythbuster.

For more specifics on provisions of the housing and economic stimulus legislation, read the stories in the Government section of this special edition of Nation?s Building News (www.nbnnews.com).

Other Provisions

The legislation would also:

  • Provide $3.9 billion in Community Development Block Grant funding for the purchase of foreclosed homes and the rehabilitation or redevelopment of residential property.

  • Provide a $500 additional standard deduction ($1,000 for married couples) in tax year 2008 for taxpayers who do not itemize their deductions but pay property taxes.

  • Increase the Department of Veterans Affairs home loan limit for high-cost housing areas so that veterans have more homeownership opportunities.

  • Help returning soldiers to stay in their home by requiring lenders to wait nine months, instead of 90 days, before starting foreclosure proceedings. Lenders must also wait one year before raising interest rates on someone returning from the military.

  • Encourage states to establish mortgage licensing and registry systems and direct the Department of Housing and Urban Development to step in if the states fail to accomplish this task.