Creative Financing

February 14, 2011 Posted by Andre Hemmersbach

Home buyers and sellers are turning back to creative financing methods in today’s competitive real estate markets. One of the “old standbys” in tough markets has been a lease with an option to buy or “Lease Option” for short.
A standard lease option allows a buyer to rent a sellers home with an option to buy that home at a set price sometime in the future. Typically an option price or down payment is given at the opening of an escrow which will be forfeited to the seller in the event that the purchaser/renter does not consummate the transaction at the end of the lease period. A monthly rent payment is paid by the purchaser/renter to the seller of the house during the option period.
The beauty of a lease option is that it can be written in any combination of creative ways. The amount of the upfront option payment, final sales price, length of the option contract, rent amount and the amount of monthly rent that will go towards the eventual purchase can be negotiated, which could create a win-win for both parties.
Take for example, a borrower who has issues securing a home loan due to the fact that he is just starting his own business and a seller who has had his property on the market for several months at a price that may be a little unreasonable at this time, could both be aided by a lease option. The buyer may be willing to pay the extra premium in price if he can lock in that price for a period of two years while real estate values correct and his business get established. He additionally negotiates for 25% of the monthly rent to go towards the eventual purchase price of the home. The seller accepts the offer of the higher than market sales price for a 7% option fee that will go towards the sales price if the option to purchase is exercised or forfeited to the seller if the deal falls through. He agrees to the buyers request to credit 25% of the rent toward the purchase price but negotiates to have the rent be $150 higher a month than previously requested.
As you can see, a lease option is extremely flexible and be the financing tool to make your real estate deal come together. It is extremely important to discuss all of the variables with an experienced real estate agent, mortgage professional, tax accountant and your attorney.

About Andre Hemmersbach

Andre Hemmersbach has been working in the mortgage banking business for over 30 year helping people successfully finance their real estate holdings. He can be reached at (310) 540-1330 #137.

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