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Avoid Lease Option Heartache!

Avoid Lease Option Heartache

So, you have some income, but you messed up your credit a few years back and with a couple of repossessions and a foreclosure, you think you'll never own a home again. How could it get worse?

Well, one way to make it worse is to fall into a predatory "Lease/Option" scheme with an unlicensed Seller.

You've seen the signs advertising, "No Bank Needed! No credit check! $2500 + $1100/month Lease Option. FSBO. No Realtors, Principals only."

It is one of the hottest marketing areas in real estate.

Lease Option can be done "right," offering homebuyers an alternative path to homeownership.

It can be done "wrong," creating added heartache for the eager and unsuspecting buyer.

http://www.wcnc.com/news/topstories/stories/wcnc-112806-al-home_solutions.345e71fd.html

How would you recognize a predatory Seller?

If the Seller discourages you from doing anything in the following list, consider running away really FAST:

•1. First and foremost: Hire a good real estate attorney to write the contract and/or review any documents, and tell you what they mean, and how you may be affected. Ask if he/she should or will hold in trust your deposit and any of your monthly payment that is earmarked for your down payment.

•2. Pay a licensed home inspector to do a full report on the home.

•3. Pay for a termite inspection.

•4. Have your insurance company check the home for insurability.

•5. Check that proper permits have been pulled and city/county inspections performed.

•6. Have the home appraised by a licensed appraiser. Valuations from fluff websites like Zillow, or the tax value are NOT acceptable substitutes.

•7. All of the above should be done by professionals YOU select, not the Seller's attorney, inspector, or appraiser.

See, with all the "Flip thisorthat House" scandal entertainment on TV, a lot of amateurs, and worse people, have jumped into the business of real estate "investing."

Often dilapidated homes are poorly rehabbed with unskilled cheap labor, no permits, and minimal disclosure regarding systems and conditions. You may be told, "You don't need an inspection. We have been over this place from one end to the other."

GET IT INSPECTED!

You can find L/O Sellers in online forums crowing about how they don't care if the L/O Buyer ever gets financing, because after the lease period, they may get to keep the "deposit" and the "extra" monthly payment. And often they are in agreement that if they do close the transaction, it is all right, because the house is overpriced anyway!

And for that year or two, they basically have a tenant who cares for the property with pride of ownership. This is not set up as a win-win. But as a No-lose proposition for the predatory "Investor."

And what if things go well, you apply for a mortgage and the house, which is probably well overpriced, doesn't appraise after the 12, 18, or 24 month lease period? Where is your deposit and "extra" money? Your attorney who writes the contract can help you answer that question.

Avoid Lease/Option Heartache! Sometimes it is better to rent!

More on Lease/Options:

http://www.google.com/search?num=20&hl=en&lr=&safe=off&rls=com.microsoft%3Aen-us&q=predatory+lease+option+&btnG=Search

North Carolina bill regarding home resale dealers:

http://www.ncleg.net/Sessions/2005/Bills/House/HTML/H725v2.html

Posted by Mike Jaquish Keller Williams Realty, Cary, NC on 01/08/2007 04:57 AM

Comments (13)

north carolina, buyer, buyers, marketing, advertising, seller, mortgage, foreclosure, real estate, realtor, fsbo, zillow, tax value, flip

This post has been included in North Carolina Information Wake County, NC Information

13 Comments on Avoid Lease Option Heartache!

Mike,

Based on your opinion or someone`s article, I must strongly disagree with you. I believe you fail to mention the positives of lease option and you truly fail to understand how it works.

01/08/2007 05:40 AM

by Scott Daniels Florida Real Estate 2.0. Agents Earn 100% Commission. (Florida List For Less Realty, Inc. Broker/Owner. )

Scott,

Thanks for the response. If I was truly 100% negative, I wouldn't have given the nod to L/O being an "alternative path to homeownership" when done "right."

My intent is to promote the use of their own professional resources to L/O Buyers, particularly regarding legal representation.

I'm open-minded on the topic. Please, tell me more, or point out my error(s).

01/08/2007 06:05 AM

by Mike Jaquish Keller Williams Realty, Cary, NC (Keller Williams Realty)

I think lease options with representation are a better option than some of these new "rent-to-own" scams. Investor is usually a mortgage guy tied with a real estate agent. They have one property (probably their own house) that they use as the advertising vehicle. I see the SAME property being advertised over and over and the monthly rent is decent so it really should have been rented a year ago. What they do is convert the call to a sale, the loan officer does the loan and the RE agent does the sale. Very high pressure is involved here and the buyer gets emotionally charged about being "able" to buy a home.

01/08/2007 08:03 AM

by Renee Burrows - Las Vegas NV Real Estate (Nevada Realty Solutions)

Thanks, Renee

"...with representation..." Such a key phrase! Thanks for including it! And I think that means legal representation, unless your state has standard forms and protoools to follow.

01/08/2007 08:08 AM

by Mike Jaquish Keller Williams Realty, Cary, NC (Keller Williams Realty)

Yeah! It's my hero from City Data!!! Great article Mike!

It's clear you do understand! I wonder if HB 725 is going to make it this year??? That was actually going to be the topic of my next blog.

David (charlotte ePro)

01/08/2007 10:30 AM

by David Kyle, Charlotte SEO (Charlotte Internet Marketing SEM Adwords)

Hey, David!

I need to lay a little lower on City Data...LOL

01/08/2007 10:50 AM

by Mike Jaquish Keller Williams Realty, Cary, NC (Keller Williams Realty)

Hi Mike, you're practically my neighbro over there in Raleigh-wood!

I think you're clearly saying go into L/O with your eyes open, and have your professionals lined up in your court. There's always the chance of predatory practice when a "non-professional" goes up against a pro. I like your open-minded style.

01/08/2007 10:03 PM

by Dawn Grasty - Durham NC Real Estate (Prudential Carolinas Realty)

Hi Mike, Here's the Lease/Option program I work. It has an 83% success rate, which is phenomenal considering the national average is about 20%. True, many predators set up L/O clients for failure. There is a win/win way of doing it.

01/09/2007 01:11 AM

by Carol Williams Wenatchee Real Estate (Willinger Real Estate)

Carol,

Thanks for your response, and the link. Yes, 83% is excellent!

The appreciation is a cornerstone in your clients getting funding, right?

In the Triangle area in North Carolina, our market is very stable. We don't see double-digit appreciation, and barely a dependable 5%. While we don't get high appreciation, we also don't have the negative volatility of "bubbles."

A lot of L/O's are offered in lower end neighborhoods where values appreciate at 2 to 3%, or less. So, at mortgage time, the only equity is what the buyer may bring to the table.

01/09/2007 05:06 AM

by Mike Jaquish Keller Williams Realty, Cary, NC (Keller Williams Realty)

Hi, Neighbor Dawn!

We know people buy on emotions, and sometimes it is difficult as a Buyer's agent to get their "eyes open." Imagine a sleazy, smooth predator who isn't bound by personal ethics or agency rules...

01/09/2007 05:14 AM

by Mike Jaquish Keller Williams Realty, Cary, NC (Keller Williams Realty)

Mike, Appreciation is a factor, but not the cornerstone. We only charge a 10% upcharge from today's market value. 5% per year is pretty easy here. Our 20 year average was about 7.8% last I checked.

01/10/2007 11:47 AM

by Carol Williams Wenatchee Real Estate (Willinger Real Estate)

Mike Has the right Idea (1st thing) Let a Real Estate Atty handle the contract from the begining, make it a seller expense for the Atty. A good one will not charge a huge fee up front because they want the Closing income down the road. Secure a relationship with the Atty and discuss your Fee for Service and how it will be handled. THis keeps the playing field fair for all...and you are not Liable.

Bring this into the Listing Presentation, handle all objectives, before you accept the listing and you should be fine.

01/27/2007 06:26 PM

by Michael Brenner (Keller Williams)

Michael, thanks for the comment. Yes, it is as easy to prepare to do it right as to scheme to do it wrong.

01/27/2007 09:55 PM

by Mike Jaquish Keller Williams Realty, Cary, NC (Keller Williams Realty)