Capitalizing on the Re-Emergence of the Rental Market By Lisa Wells
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According to CNN, "homeowners trying to sell last month faced the biggest
glut of homes on the market in about 16 years, as declining sales and
growing problems in the mortgage market helped push home prices down for the
12th straight month." [Source:
http://money.cnn.com/2007/08/27/news/economy/homesales/index.htm?cnn=yes]
The good news is if you are a rental property investor, now is the perfect
time to pick up great deals in the market, as home prices continue to drop.
And, if you are already holding existing rental properties, you have a great
opportunity to return to 100% occupancy as so many people with "less than
perfect" credit are returning to rentals after the sudden downturn of the
sub-prime lending market.
With the incredible number of houses currently on the market -- more than
4.59 million - homeowners may wish to consider lease-purchase options when
selling their property. Enacting a lease-purchase contract will allow the
property owner to cover the cost of the mortgage while giving a potential
homebuyer more time to save money for the house down-payment.
What is a lease-purchase contract?
Wikipedia.org defines a lease purchase contract (also known as Lease Option)
as "a form of real estate purchase which combines elements of a traditional
rental agreement with an exclusive option of right of first refusal to later
purchase the home. These contracts are commonly used where a buyer wants to
purchase a home, but due to credit issues would not qualify for a
conventional mortgage and does not wish to, or would not qualify, for FHA or
VA financing."
How does a lease-purchase contract work?
Usually when a landlord/seller wants to offer a lease-purchase option to a
prospective renter, the tenant/buyer will agree to a lease period, during or
after which the tenant/buyer has the exclusive right to purchase the home at
a previously agreed-upon price. The landlord/seller will apply a percentage
of the rent during this time period toward the purchase price of the home.
The good news for the landlord/seller is that if the tenant/buyer does not
wish or is unable to purchase the house at the end of the lease term, the
landlord can choose one of the following three options:
1.Extend the lease-purchase agreement with the current tenant,
2. Convert the lease purchase contract into a traditional rental agreement
with the tenant, or
3. End the contract with the renter, who will then move out, allowing the
landlord to seek other renters or buyers.
And, if the renter fails to pay the rent during the lease-purchase term as
specified in the agreement, the landlord can include a clause in the
contract to end the rental term immediately upon non-payment, which would
then allow the landlord/seller to quickly seek a new renter or buyer for the
property.
Capitalizing on the rental market
As new home sales continue to slow, and home prices are declining regardless
of location due to the enormous supply of homes on the market, capitalizing
on the rental market through a lease-purchase option makes sense for many
homeowners, and it was the right solution for me too.
I am a landlord myself, and own several rental properties. I have a
lease-purchase agreement in place with one of my tenants currently. The
lease-purchase has allowed me to cover the cost of my mortgage and HOA fees
[this property is a townhouse], and the renter has cheerfully treated the
home as if it is their own - simply because one day it may be theirs. When
it comes to maintenance issues, we tackle them together, and many times the
renter will do the work as long as I cover the cost for any necessary
supplies, paint or parts.
If you are a realtor, approach your prospective sellers with the idea of a
lease-purchase to see if it makes sense for their situation. And, if you are
a property investor, consider picking up some of the bargains that are out
there right now - a lease-purchase option might be a great way for you to
expand your rental property portfolio while waiting for the real estate
market to "remodel" to the seller's advantage.
And obviously, before renting to anyone, regardless of the terms of the
contract, check the prospective renter's background to see what's in their
criminal, credit and eviction history. Your odds of having a successful [and
profitable] rental experience are much higher when you take the time to
perform simple and easy due diligence on renters through an online
background check.
As always, information in this article is not intended to be used, and
should not be used, as legal, tax or accounting advice. Investors should
seek advice from an independent financial advisor about their specific
situation.
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