3 Methods to Buy or Sell Property without Bank Fin

[Brian Gibbons]

3 Methods to Buy or Sell Property without Bank Financing

What slows down real estate transactions?
What adds on thousands of dollars when you are buying a home?
What can cause delays of two months or more when you are selling?

Bank Loans!

Buyers have to jump through hoops.
Sellers rack up expenses while waiting for a house to sell.
And even the strongest Investors eventually reach a point where they can’t qualify for anymore money.

There is a better way!

I want to show you three different ways to do real estate transactions without going through a bank.

These strategies can allow buyers to finally get into their own home. Sellers can quickly get top, or even above market price for their house. And investors can quickly do deals in days instead of weeks or months.

The three strategies we will be looking at are:

• Lease Options

• Land Contracts

• Taking Over (Buying Subject To) Existing Loans

These strategies are used every day throughout the country. I have used all three and have had great success with them all. So let’s get started.

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[Brian Gibbons]

1) Lease Options

This is absolutely the easiest way for you to get into a home. It is also a great way to quickly sell a home for top price. Because of this, I am going to spend most of the time devoted to this plan.

Rent To Own, Lease Purchase and Lease with an Option to Buy are the other common terms for a Lease Option. They are basically all the same things.

Control and profit for Buyers. Ownership is great, but control is what is important. A lease option gives you that control without using large amounts of money and it doesn’t require great credit.

You can often get into a property for the same amount you can rent it for. Often just the first months rent and the same amount as a deposit. You can also have lower monthly payments than if you were paying a loan payment, taxes and insurance.

And a portion of the rent usually will be credited towards the purchase price. This will build equity much faster than if you were paying a loan payment where a very small portion of the payment, especially in the first few years, applies towards the principle.

The purchase price is usually locked in with a lease purchase so you will benefit from any appreciation during the term of the lease. This can give you substantial equity and help if you try to get a loan at the end of the lease.

Major repairs are the owner’s responsibility during the lease. You may need to take care of minor maintenance such as fixing a leaky pipe, but the owner would be required to cover major costly items that would make the house uninhabitable such as roof, heat, electrical etc.

A Lease Option is a Lease Agreement combined with an Option Agreement, or the right for you to purchase the property. Typically, you would be responsible for obtaining financing to pay off the Seller within a year or two, although any seller financing could be incorporated into the agreement. When you follow through and decide to purchase it is called exercising the Option.

You are trying to lock in as much time as possible and put up as little money out of pocket as possible.

The Lease can be a typical rental agreement, but the Option Agreement must contain the following details:

• The length of the lease term. The more time, the better. More time helps you to find the best financing, improve your credit and benefit from any equity. A typical Lease Option goes anywhere from one year to five years. Most are in the 18-month to three-year range. If you have had a bankruptcy lenders will want to see at least two years of clean credit before they will loan to you.

• The purchase price should be agreed upon from the beginning. When buying you want to avoid any floating price based on getting an appraisal at the end of the lease.

• The Option Fee (option consideration). Some sort of fee must be paid or the Option may not be legally binding on the Seller. Try to negotiate something close to a typical Rental Deposit or one months rent.

• Rent Credit Toward the Purchase. Usually a portion of the rent will be credited towards the purchase price. This can be anywhere from $100 per month to 50% of the rent. Large rent credits can be to your advantage although in most instances it may be better to get lower rent with no credit than to pay over-market rent and get a rent credit.

• Extensions. It’s a good idea to try negotiating the right to extend the Agreement. You can offer an additional non-refundable deposit (as little as possible) for the right to extend your agreement another year and keep any option deposits or rent credits in place. This will buy you more time if you have any difficulty in getting financing. And the deposit will also apply towards the purchase.

• Financing Terms. With a typical lease option you will be required to come through with your own financing at the end. If you can negotiate that the seller will carry some or all of the financing, this should be written into your original agreement. Even if you have to pay the seller a high interest rate for a while, it may give you time to obtain better long term financing.

• Maintenance. You will want to spell out who will be responsible for maintenance during the lease. If you will take care of normal maintenance during the lease, this has a strong appeal to a seller. They will like that you won’t be calling on minor plumbing leaks or plugged toilets. However, you don’t want to get stuck with the expense of a large repair. You may put a dollar limit on the amount you will cover for the repair or how much you will spend per month on maintenance.

Finding Properties. There are no lists of properties available for Lease Options. Agents usually don’t deal in them and even if they do they will tend to drive up the amount of money required to get in because they will be getting part of their commission from your option money.

You will need to put your time in and make calls to rental property owners and sellers. When you call, take some time to find out what the seller/landlord’s needs are and then show them how a Lease Purchase can solve their problem.

A good source for Lease Purchase properties is rental property owners. They are already advertising their homes for rent and they know what Lease is. Show them that you can offer to pay on time, take care of minor maintenance and offer an eventual sale at a good price without paying sales commissions or closing costs.

Convince them that you are a reliable person who can take care of the property, will pay on time and will put an end to maintenance hassles. Show them that this will put an end to the usual landlord problems. There are many burned-out landlords that may be interested in what you have to offer.

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[Brian Gibbons]

Quick Turn and Top Price for Sellers with a Lease Purchase

A Lease Purchase is a great way to sell a house. You can get top price, great cash flow and pay no commissions or closing costs. You can also avoid having a vacant house and paying carrying cost.

A huge benefit is that it is so easy to find a tenant/buyer and then so quick to set up, that you can work around your time frame instead of putting your life on hold waiting for a house to sell.

If you have read the buyer’s information above, you know the items that need to be included in a Lease Purchase. You just need to try to set up each item to your advantage.

• The length of the lease term. You retain greater control if you keep the lease purchase term short. A one-year agreement works well. This allows you to collect a renewal fee and/or negotiate increased rent and sales price. If you have a tenant/buyer who decides not to renew, their option fee and rent credit were non-refundable and you can do it all over again with another tenant/buyer and profit further.

• The Purchase Price. Because of the high demand for lease purchase properties you can ask a premium sales price. A minimum amount would be 5% over the top market price for the home. You might ask more if you were giving a very large rent credit. And in very hot markets you may go higher or reconsider if you really want to get rid of the property at this time at all.

• The Option Fee (option consideration). You should receive 2% to 5% of the purchase price as non-refundable option consideration before the tenant/buyer moves in. Cash or cashiers checks only!

• Rent Credit Toward the Purchase. A portion of the rent will usually be credited towards the purchase price. This can be anywhere from $100 per month to 50% of the rent. You will generally want to keep the rent credit to a minimum. Although, large rent credits can be a great marketing tool and do have their place. They can be a good way to rent a property quickly or move a hard to sell property. We set it up so that the tenant/buyer will forfeit any rent credit for the month if the rent is late, so a large rent credit can be a huge incentive for them to pay on time.

• Extensions. If the tenant/buyer is not ready to purchase the property once the lease term has run out they will probably want to extend the agreement. This is your chance to collect more non-refundable option consideration in exchange for the extension. You may also want to renegotiate other terms of the agreement such as rent and rent credits and purchase price.

• Financing Terms. With a typical lease option the tenant/buyer will be required to come through with their own financing at the end. Anything else is up to you. If you want to make your deal more appealing (and possibly receive a higher option fee and greater rent) you may want to assure them that you can carry some financing if they have trouble getting a large enough loan. Make this offer only if you are comfortable carrying some financing and make sure they know your offer is good only if they have lived up to the terms of the agreement. Using a lease purchase is a great way to get to know the tenant/buyer before you are locked in to owner financing.

• Maintenance. Have the tenant/buyer be responsible for all minor maintenance. This could cover anything from plugged drains and leaky faucets all the way up to replacing a garbage disposal or broken window. You will still be responsible for any major items that would make the house uninhabitable such as a broken furnace or damaged roof.

• Insurance. You will need a Landlords Policy when offer your property for Lease Purchase. You may also want to require that the tenant/buyer get Renters Insurance to cover their possessions.

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[Brian Gibbons]

Finding Tenant/Buyers is the easy part of a Lease Purchase.

We run ads that start with “Rent To Own” and if you mention a large rent credit in the ad the phone will ring non-stop.

There is always a strong demand and you will have many prospects to choose from. We always run a credit check and also check for any prior evictions. You should also call their employer and previous landlords.

“Due On Sale” Clause.
Since the next two sections on how to purchase without obtaining bank financing may involve properties with existing loans we should cover an item written into most loan papers. It is called a “Due On Sale” clause and it gives the bank the right to demand payoff of the loan if the property is sold.

First of all, it is not in the bank’s best interest to call the loan due if the payments are being made. Lenders in general are not concerned much about title transfers as long as the loan payments are current. They are not out looking for transfers (sales).

The most common way for the lender to find out is that if the insurance policy is changed the lender will be notified. A way around this is to keep the current insurance policy in place and simply add the new buyer onto the policy as an additional insured. The insurance agent could tell you if the policy would need to be changed to a Landlords Policy.

In the unlikely event the lender did find out about the sale, they may want the new buyer to apply and qualify to take over the loan. And they would try to charge a loan assumption fee.

If they did decide to call the loan due they would normally give 30 days to pay it off and then they could start a foreclosure. If they buyer were in a position to, they could refinance and pay off the old loan. If a few years had passed, the property would have probably appreciated and the buyer would hopefully have a record of on-time payments. This would make it much more likely that the buyer could qualify and be able to refinance, even if they weren’t in a position to when the original purchase was made.

“Due on Sale” Summary – It is not illegal to take over payments on a loan! By keeping the insurance policy in place and making the payments on time you will avoid most problems with Due on Sale. There are more extensive ways to avoid problems such as deeding the property into a land trust and then assigning the beneficial interest in the trust to the buyer. A good real estate attorney can easily handle the paperwork.

[Brian Gibbons]

2) Land Contracts

Also known as Contract for Deed, Wrap-Around Mortgage or Agreement for Sale, Land Contracts can be a useful way to buy or sell property.

Title stays in the seller’s name. It is basically a sale with seller financing, except the legal title to the property stays in the seller’s name until the loan is paid off.

The best comparison is the purchase of a car, where the bank holds title until the loan is paid off. The buyer has all the benefits of ownership, they can improve or sell the property, the title issue is the only difference.

The IRS treats the transaction as a sale. The buyer gets the tax write-off on the property.

The buyer would make their payment to the seller (or a collection account) and then the seller, or the collection company, would pay any underlying loans, tax and insurance payments or homeowner’s dues. The remaining money would go to the seller each month.

If there is an underlying loan on the property it is best to not tell the lender because of the Due On Sale clause in most loans that is mentioned in a previous section.

Existing VA Loans are great candidates for land contracts because the VA doesn’t care as long as title stays in the original borrower’s name. You can buy a property with a VA loan on a land contract and resell on a land contract as long as the title doesn’t transfer from the original borrower’s name.

Buyers - As far as the buyer is concerned, it is basically a sale with seller financing, except the title has not been transferred. If there is no underlying loan the buyer should try to get title so that they have more security. If title won’t be transferred, it may be held unrecorded by a third party such as an attorney or possibly a title company.

The benefits for buyers, besides no bank qualifying, are; no loan fees, possibly no closing costs, low down payment, getting the tax deduction and a quick transaction.

Sellers – Will be basically leaving the existing loan and insurance in place and then writing a new seller carry loan to the buyer. You will need to do your own qualifying of the buyer and will have to decide how much of a down payment will make you feel secure.

As stated above, title can be held unrecorded by a third party (trustee) and in some states where it might be more difficult to get rid of a defaulting buyer (such as California) the trustee can be given the right to foreclose (power of sale).

The benefits for sellers are that there is such a high demand for seller financing that they can ask a higher sale price, name their own down payment and charge a higher interest rate giving a better cash flow. They can do a transaction in a matter of days. And there are tax benefits with installment sales.

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[Brian Gibbons]

3) Buying Subject To Existing Loans

This is basically taking over loan payments on an existing loan. It will take a motivated seller because they will remain liable for the loan until it is paid off, but often it is the best choice a seller has available.

These could be homes which Sellers have just purchased in the past few years and then for some reason they now need to sell.

If they bought the home with a new FHA, VA, or a low down payment conventional mortgage loan, they may have financed anywhere from 95% to 100% of the purchase price. Some of them financed even more, because their closing costs and mortgage insurance premium may be added to the loan.

Since they have only been in the house short time they will have very little equity. In fact, they probably won’t have enough equity to sell the house and pay any commission and closing costs. If they are having trouble making the loan payment they probably don’t have the money to pay these expenses out of pocket.

Their main concern becomes getting out from under the burden of the loan payment. They may not expect to get anything from the sale. If they have looked at their situation realistically, they just don’t want to have to pay anything out of pocket to close.

They may be making two mortgage payments, one on the existing house and the other on a new home. They may have been transferred and need to sell quickly. They may have lost a job and can’t keep up with the payments.

You can offer a great solution.
The offer would be to take over the loan payments and possibly pay them something to help them on their way. The benefits to the seller would be avoiding credit problems or even foreclosure and a quick sale so they can get on with their lives.

The Deed (title) to the property and the loan are two separate things. With this type of purchase the loan stays in the seller’s name, but the buyer gets title to the property. The buyer just continues making the loan payments on time. If the seller is behind on the loan payments the buyer will have to make up the back payments.

Sellers will have concerns that will need to be addressed. Since the buyer doesn’t formally qualify and assume the loan, the loan is still in the seller’s name. This means the seller still is liable for the loan and the seller’s credit history is at risk. This may make the seller reluctant to transfer ownership to the home.

There is a security document called a “Performance Mortgage” or “Deed of Trust to Secure Performance” (this can be prepared by a good real estate attorney). This document gives the seller the right to foreclose and take the property back if the buyer doesn’t live up to their agreement to keep the loan payments current.

Another concern is the Due on Sale clause mentioned earlier. One technique to avoid the problem is to transfer the title to the property into a Land Trust. This is done all the time for estate planning and asset protection and lenders don’t have a problem with it. If they find out at all they would simply see the recorded Trust Agreement. What they wouldn’t see would be the Beneficial Interest (essentially the property ownership) in the Trust being transferred to the buyer. This doesn’t have to be recorded. The insurance policy would also be changed to show the Trust and the lender as the insured. Consult a good real estate attorney.

Buyer Benefits –
No loan fees, low closing costs, quick close, no qualifying or credit required and possibly very low down payment. These can be very good, low interest rate loans that can be taken over.

Seller Benefits –
Most sellers will want to avoid selling this way unless it is a last resort. However, if you are in a bind this can be a solution. You can avoid a foreclosure and hopefully preserve your credit. The Performance Mortgage mentioned earlier would be a good idea to retain some control.

Investor Benefits –
Investors may buy a property this way and then Lease Option it out to a third party and collect an option fee, cash flow every month from higher incoming payments and profit at the end from a higher sales price when it sells.

Pre-foreclosures - This is a common technique when buying a pre-foreclosure (buying from the owner before the foreclosure sale).

If you have found a property that you can buy well under market value and you will be quickly reselling, you will be less concerned with the bank finding out. If you are going to hold the property longer term you will want to use the strategies mentioned above to avoid tipping off the lender.

Summary –
So there you have it, three great ways to buy or control property without the hassles of bank qualifying.

All three offer quick solutions and there can be benefits for all parties.