In my experience purchasing real estate can sometimes come with challenges when you are working with lending institutions.  I always inform my buyers ahead of time that banks are requiring borrowers to comply with stringent lending guidelines.  And this is making it impossible for some buyer’s to qualify or acquire favorable loan terms.  When this type of situation arises I encourage my clients to consider creative financing options.  I recommend Seller Financing and Lease Options (lease with the option to purchase).  These options are not new to the market however they are widely underused and can be beneficial to the home buyer, seller, tenant and landlord. 

What is Seller financing?

Simply put the seller becomes the lender for the property.  I advise my clients to only work with a seller that owns the property free and clear.  And with the assistance of a real estate broker the seller and the buyer can negotiate the terms of the loan which include interest rate, repayment schedule and delinquency ramifications.  Keep in mind the repayment period for a seller financed property is normally short term and could last between 5-10 years.  At that point you can either pay off the loan in full or secure a loan from a bank or outside source. 

Buyer Benefits

I tell my clients who might not otherwise qualify for a traditional mortgage or receive favorable loan terms they are an ideal candidate for seller financing.  This type of creative lending will allow them to become an immediate homeowner.  In the meantime they have the opportunity to work out the challenges that are preventing an approval of a traditional mortgage.  It is refreshing to know that the competition is normally low with seller financing transactions because they are not heavily marketed. 

Seller Benefits

As previously stated, many buyers are eliminated from the home buying process due to strict lending guidelines.  If your property has no loan encumbrances, consider offering seller financing because it will open up the doors to a larger buyer pool. Furthermore, once you have a qualified buyer you will receive an income stream that includes regular monthly payments plus interest.  In addition, the liability of taxes, homeowners insurance and property maintenance becomes the responsibility of the buyer.  Also, if the buyer defaults on the loan payments you can start the foreclosure process and eventually take back ownership of the property and resale it.  Keep in mind you also have the option of selling the promissory note to an investor and receive a lump sum amount. 

What are Lease Options (Lease with the Option to Purchase)?

According to the National Association of Realtors (NAR) 2016, “The lease-option agreement allows a buyer to lease a property for a set period of time—typically between 1-3 years—with the option to buy the property at a contractual future date.”

Tenant Benefits

It is refreshing to know that tenants can become homeowners too.  One of the appealing parts of a lease option is that you can lock in a purchase price today for a future purchase date.  Also an agreed portion of your monthly rent and upfront option money is held in a trust/escrow account and credited toward the purchase price of the property.  An additional benefit is that if you choose to purchase the property it may have increased in value and you will have built in equity. 

Remember if you decide not to purchase the property your upfront option money and portions of your monthly rent will be forfeited.  However, the option may be assignable depending on the structure of the agreement. 

What’s in it for the Landlord?

A tenant that has an interest in a lease option can be quite beneficial to a Landlord.  For instance, a tenant will more than likely take better care of their property especially if they plan to buy it.  As a Landlord, you will receive upfront option money and monthly lease payments.  And if the tenant fails to exercise the option you can retain all monies paid in advance and keep the property.  This makes it a win-win situation. 

It is important to remember seller financing and lease options are not the norm therefore I always advise my clients to speak to a real estate attorney and a tax advisor before entering into non-traditional agreements.

Written By: Yvette C. Page