So, we've all heard the nightmare stories of dealing with obtaining bank loans these days. Add to that, the fact that foreclosure properties have flooded the market and driven down prices for Sellers, and you get a large number of Sellers battling back by actively participating with Seller financing to move their property.
Recent lending adjustments only rarely allow Sellers to contribute costs to Buyers to allow them ease of buying (perhaps to assure that REOs are being considered if anything is being sold). That leaves us with two primary methods for Sellers to facilitate the sale of their properties: Owner Financing or Lease Purchase.
Most people don't know what the difference is, or even what those terms mean. I have many Sellers who are participating in both programs; I have closed many under both terms over the past few years, and there are distinct differences. So, pull up a chair, grab some coffee, and find out . . .
With Owner Financing, there is an actual closing. The Buyer takes title to the property with the Seller providing a (typically short term) first "mortgage". Essentially, with owner financing, the Seller becomes the bank.
This is the better of the two options for everyone involved in the process, but the process has two basic requirements which are difficult to meet:
- The Seller must own the property outright, or be close enough to paying off his own mortgage that a downpayment can satisfy the pay-off. You see this most often with inheritance properties or investor owned properties, though many times on Lake Hartwell a Seller has owned a lake property long enough to have paid it off or they purchased their second home with cash.
- The Buyer must have a substantial downpayment. Remember I said with owner financing, there is an actual closing. The Buyer must have a downpayment large enough to convince the Seller to take it off the market, but also large enough to pay the closing costs, inspections, and to pay the Realtor Commission (yes, providing our services is actually how we make a living!). Seems unbelievable a Buyer could have money yet be unable to obtain a loan, but it happens. I've seen it most often with a Buyer who relocated to the area and has a home they cannot sell elsewhere, but also with a Buyer who has a small mar on their credit which needs time to season, and sometimes even a Buyer who wants to work their way with equity below the "jumbo loan" mark so they can obtain a better interest rate.
On the rare occassion when you have a Buyer with money and a Seller who owes no money, Owner Financing is a perfect scenerio. The Buyer is responsible for taxes, insurance, upkeep, and maintenance. The Seller makes more money from the sale because they pocket two to three years of additional interest income. It can close very quickly, and the Buyer is able to gain equity as they continue to make payments so refinancing is easier than a purchase loan.
The downside is - just like any loan - the Buyer could fall behind on payments. For my clients, I work to prevent this from happening in two ways: I thoroughly check the credit and background of the potential Buyer, and I assure the Buyer is paying, on average, at least a 15% downpayment- which they are not likely to walk away from and lose.
However, if it does happen, in Georgia the Seller can foreclose quite simply by accelerating the balance due, running notice of foreclosure in the local newspaper for four weeks, and foreclosing on the court house steps. The Seller still retains the initial downpayment, the monthly payments made prior to the foreclosure, and they take the house back, ready to be sold again. I love owner financing and all of my clients who offer it!
Lease Purchase is an entirely different animal. There is no closing. The Seller continues to own the home and is responsible for taxes, insurance, maintenance, etc. The Buyer has no deed to the property, and generally doesn't pay much more than a security deposit to get into it. The Buyer does have slightly more "pride of ownership", but it is still primarily a tenant/landlord mentality.
The lease purchase is typically used instead of owner financing when the Seller is not in a position to pay off the loan on their home and the Buyer is not in a position to put down a large downpayment. We see these more often in situations where Sellers are a little desperate to get out from under it and the Buyers LOVE the home, but are not able to get a loan to purchase it. Though, often investors or builders who were left with inventory but aren't willing to make the "business decision" to let it go back to the bank will also participate in this process just to keep getting by in hopes of a better tomorrow.
Because there is no closing until the pre-determined end of the lease purchase time frame (which is difficult to estimate since we are more often than not just hoping the Buyer can get a loan in the future), no one really gets paid. Sellers and Realtors are holding on indefinitely waiting on a payoff, and Buyers are not gaining equity towards the home (another lending adjustment . . . there are only certain situations in which lease purchase payments are allowed to apply towards equity or earnest money in the home.).
In my opinion, the worst part of the Lease Purchase scenerio, however, is the horror stories I've heard from Buyers who actually put down a decent downpayment, improved the property, and paid faithfully over the time frame, only to end up with the bank's representative on their front steps offering them "cash for keys". Some Sellers, despite their best intentions, just aren't able to use the money of a lease to prevent them from loosing the house to foreclosure. So, there has been more than one crying Buyer on my porch steps claiming another Realtor set this up with this lease purchase scenerio, but now the Seller is being foreclosed on and they only have 2 weeks to move out of their house and find another.
I, personally, will not even entertain the idea of a lease purchase for my listing clients unless they allow me to manage the property - including making mortgage payments and escrowing to pay taxes and insurance when due. It isn't that I don't trust my clients, it's just that after a while, as a lease purchase drags on, the Sellers - more often than not - see the Buyer as a person who falsly lead them to believe they would be able to get a loan when circumstances may still not allow it, didn't put enough earnest money down to put them in a better position, and have nothing in the house. I personally have a property on lease purchase right now and adore the tenant/buyers, but am so ready for them to finally just buy the house!!!
Mix the unsure time frame of closing and the fact that times are like they are, and Sellers could too easily find the temptation is there to use the monthly rent money for the new set of brakes their car needs or the new set of braces their child needs. In my opinion, Lease Purchases need to be run through a Realtor Trust Account, or both Buyer and Seller are simply setting themselves up for failure.
That being said, in the hands of a reliable Realtor, a Lease Purchase can help both a willing Seller and a willing Buyer find one another and help one another through until the time comes when the ever difficult to obtain bank loan finally comes and they both accomplish their goals. So, along those lines, Lease Purchases are another God-Send allowing us to work around the banks' criteria to eventually bring two great people to a successful meeting of the minds.
With everything I've said, please don't get me wrong - many people still obtain bank loans every day and close on their properties (within 45 to 60 days) the old fashioned way. There are still 100% bank loan products out there, and definitely FHA 3% down loans. But, if you really want to sell or buy and are concerned you aren't going to be able, call me and let's look outside the box to determine if there is something else we can do to move things along!