August 25th, 2008Renting To Own in Hampton Roads
Here’s a very informative article about the renting to own properties in the Hampton Roads area. This can be a great choice for both buyers and sellers. The article was printed in Virginian Pilot 8/23/08 and is written by Jeanne Mooney.
Whether you call them rent-to-own or leas-purchase agreements, there’s another tool in home sellers’ kit.
Mickey Collins’ client juggled two house payments a month last year while trying to sell her former home in Surry. The financial burden got heavy fast. “Get someone in my house to cover the mortgage, ” the real estate agent’s client insisted. Aid came in the form of a buyer who asked to rent the home for a year before closing a sale. He needed time to improve his credit.
Collins’ client agreed and signed a rent-to-own deal. Essentially, it was a purchase contract with a settlement date set 12 months in advance. It established a closing date, a sale price and the monthly rent the intedned buyer would pay in the interim.
The contract was roughly akin to an early possession agreement, allowing the buyers to move in before the closing date and put the onus on them for repairs. But it also included a promise from the seller to set aside $100 of the $900 monthly rent for the buyer to use as a down payment.
Collins, an agent with Realty Executives, said she would have a preferred a simple purchase offer for her client. But the next best thing wa the lease-purchase. It captured a sale, albeit a delayed one, and rental income.
“They’ve got to do something to generate the cash until they get their home sold, ” Collins said.
Lease-purchase agreements are not new. Collins remembers them from the late 1980s. Today, they are used sparingly by home sellers in Hampton Roads. Almost 120 listings – less than 1 percent of the roughly 15,200 homes for sale in the local multiple listing service – indicated a seller willingness to accept such a deal.
Still, agents such as Collins say that while the option is complicated and includes a measure of risk, it has merit for sellers. Bryan Cerny agreed. “It gives them the presence of mind and a commitment,” said Cerny, a real estate agent with Rose & Womble Realty Co.
“I think we may see more of them,” said Pat Steele, a sales manager with Coldwell Banker Professional, Realtors.
Of the many ways to sell a home, a lease-purchase is last on the list for Jim Burres. “There are so many ifs, ands and buts,” said Burres, a real estate agent with Century 21 Nachman Realty. He and other agents cite these possible risks:
- The neighborhood market value could increase above or decrease below the negotiated sum in a lease-purchase contract. If so, a buyer in a declining market theoretically would have to pay the difference in cash, assuming the appraisal fell below the agreed upon price. In a rising market, the seller would lose money.
Becky Claggett, a managing broker with Century 21 Nachman Realty, doubts sellers will see prices drop precipitiously. But she said a defense measure against a changing market is to include language that allows the seller and buyer to get an appraisal near the closing date. Set limits on how much value change either party would accept, she suggested.
“You have to think, ‘What can go wrong and how can I fix it?’” Clagget said.
- After living in the home for nearly a year, the buyer may not have gained ground to improve his credit standing.
Or, Maybe his former home hasn’t sold. Now the seller has lost months of potential marketing time, and the buyer may find himself in a contract he is unable to fulfill. Buyer and seller beware said Susan Watford of William E. Wood and Associates, Realtors.
Watford recommends that the buyer leave himself and “out.” Seek language that releases him from the contract if his former home hasn’t sold six months prior to closing or if he hasn’t qualified for a lon with in a set time.
The seller, meanwhile, should include a clause that allows him to market the home if the buyer cannot get pre-approval for a home loan, Burres said. Sellers should require the buyer to show proof of pre-approval for a home loan, Burres said.
- A buyer may lose the portion of rent that he let the seller set aside for a down payment, agents say.
“That’s very standard,” Steele asid. She calls it “skin in the game” and said it is an incentive for a buyer to honor contract terms.
- A seller may see his property damaged prior to closing.
Require the buyer to get property insurance and make repairs when a system fails, Steele said. Those terms are often in a buyer’s possession agreement.
The man who agreed to buy Collins’ client’s home in Surry last October 2007 suffered a setback after moving in, Collins said. He was hospitalized and unable to work months, she said. He will move out of Collins’ client’s home. Meanwhile, Collins has begun a new campaign to sell it.
“This is just one of those life circumstances,” she said. Collins is helping another client sell a virginia Beach home under a lease-purchase agreement. IN the home for 20 months, the buyer is due to close in November. Still, Collins has begun a new push to sell the property, just in case he doesn’t.
Her advice? “Sellers need to keep in mind, and what agents should tell them, is there’s always a chance this may never close,” she said.
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