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Selling Your Home With A Lease Option

While often the ideal situation is to sell your house outright, sometimes the situation makes it difficult or impossible.  Everyone looks at the numbers involved in a sale and each person has their own needs that have to be met before they can move forward.

Using a Realtor

The first thought when it comes to selling property is usually to hire a realtor.  After all, this is their job.  They know the market and have the skills to move the place quickly.  The truth is that there are some that have higher levels of knowledge and skill than others, but for the moment that is actually beside the point.  They look the property and decide what the market will pay for it.  The rub comes when they find that too much is owed on the property and there is little or no room for their commission and other closing costs... or the seller finds that after these costs are taken out there isn't much left for him (or her).  These average around eight percent of the selling price once all the costs are calculated.

That is around $8,000 on a $100,000 property or $16,000 on a $200,000.  Before you go off on the greed of the agents, keep in mind that the buyers agents and sellers agents split the commission and their brokers get a share. Then there is advertising, photographers, admin help all come out of that as well.  Beyond that are doc stamps and title insurance fees.  When you look down a HUD closing statement you may be amazed at everyone who has their hand out for a piece of the pie... much of it mandated by the folks you elect to the various governing bodies.  Because of this, you need a pretty good amount of equity just to break even.

If you find yourself in this position, or if you have talked with a realtor and came away with a list of repairs that need to be handled that you have neither the time, budget nor inclination to do, you may look for another path.  Keep in mind, the realtor is generally not wrong about what will help sell your house for the best price.  If possible you may want to follow their advice.

Leasing the Property

However, if this is not a viable option for you, all is not lost.  There are various things you can do, but on this page we will be looking at leasing the property to someone that has the down payment and the income to purchase your house, but for one reason or another, cannot get financing from a regular mortgage lender.  This can be for various reasons such as length of time on the job or being self employed.  Self employed people, or business owners face a dilemma when showing income on tax returns.  To minimize taxes to the various levels of government their accountants goal is to show as much in expenses as possible to show as little income as possible.  This is not what a loan underwriter likes to see... so people with reasonably good incomes can have a difficult time getting the money to buy a house. 

Little or No Equity

If you are in a situation where you are trying to sell a house with little equity - that is the difference between the value of the property and what you owe - leasing the property to someone with the option to buy may be the best solution if you just want to get the house and the payments off your hands.  You may even find yourself underwater - owing more than the market price for the property.   I say leasing rather than just taking back the financing because there are federal laws about home financing that will make your head spin thanks to Mr Dodd and Mr Frank, and TRID requirements that getting things wrong can be a really negative experience.  This is why banksters have armies of lawyers doing their best to make sure they get their money and don't run afoul of the law.  If you should desire to do this, spending a few hundred dollars with a mortgage broker can save much time, aggravation and money.  This would be called a wrap around mortgage because you still are on the hook with your lender.  The idea is your buyer would pay you and you would pay your bank.  Hopefully here would be a spread between the two to put some money in your pocket.

There is always the small chance that this action would trigger the due-on-sale clause in your mortgage and result in the bank calling the entire loan due, however they are generally content if they are getting regular payments.  You would most likely be looking at up to a couple hundred dollars a month income from the loan AND if the buyers stops paying, you have to go through a full foreclosure process rather than a simple eviction. Hence the value of the lease.

This puts us back with the lease with option to buy.  These tend to work out well if you do some checking on the lessee such checking references, etc. When you make this agreement, you will get a deposit (otherwise known as the option consideration) that is yours to keep.  It is not a deposit that must be held in an appropriate account for return to the renter.  Generally the term is one year with an additional year or two available. However if the payments are regular, there is not much accomplished by ending the arrangement if it goes longer. 

As time goes by, chances are your property will increase in value and it is being paid down with the payments you receive.  There may even be a little left over for you each month if the rent is sufficient.  This time gives the buyer the opportunity to clean up their credit report if necessary or make other financial arrangements to complete the purchase and they take care of the property as if it was their own, because that is their intention.  While not as arduous as the mortgage requirements the paperwork still needs to be handled properly.

In a mean time you are relieved of the necessity to make payments on a house you do not want,  no longer need or can no longer afford and you can look forward to the time when you get the payoff as they complete the purchase.  What happens if they do not actually buy but change their plans and move somewhere else?  You do this again and get another deposit and, hopefully sell it for a higher price.  If they do stop paying, in this case you just need a simple eviction and you can move on.

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