Minimizing Risk - Rent to Own|Lease Option

Tips for Home Sellers to Minimize Their Risk in Lease-to-Own Transactions

The economic downturn in the housing market over the past 5 years has driven up the number of sellers willing to consider leasing out their homes with an option to sell.  This can be a wise move in the right situation but sellers need to make sure they take steps to minimize their risk in these transactions.

Demand an Option Fee Up Front

For the duration of the lease the seller of the home cannot market the home to would-be buyers.  This time period could be as short as one year or as long as three years depending on the renter’s financial condition.  Sellers should demand an option fee up front.  This fee can be applied to the purchase if the renter indeed manages to arrange financing at the end of the lease.  However, if the renter decides to pursue another home, they forfeit the fee.  This fee is usually in the range of 3% to 5% of the agreed purchase price in order to ensure the buyer is committed to the purchase.

Protect Against Appreciation

Once again, going back to the fact that the seller is not able to market the home while it is under a lease contract, it is possible the home could appreciate greatly in value.  It is wise for most sellers to add at least 5% to the current market price of the home when writing out the lease-to-own contract to help the seller reduce their possible loss.  At the same time, the buyer is getting a price on the home, in writing, for a future date.  This is a big plus for the buyer since they now know the price cannot rise.

Work Out a Contract for Maintenance and Repairs

In order to give the buyers the sense of actually owning the home, sellers can ask buyers to sign a contract that spells out responsibilities for maintenance and repairs.  Obviously, most renters will not be inclined to pay for major repairs such as a roof replacement or installing a new heating and air conditioning system.  But the seller may want to enforce a policy that lawn maintenance, modest repairs for plumbing and electrical needs, and other such items are the responsibility of the buyer.  This can help the buyer budget for future repairs and also help them decide if they are financially ready to purchase a home.

Carrying Additional Insurance

While the buyer/renter is in the home as a tenant sellers will require proof of renters insurance.  However, it is a good idea to carry an additional policy on their home beyond their current needs.  Catastrophic events such as tornadoes, fires and floods happen when we least expect them.  Nothing makes a tragedy worse than realizing there was not sufficient insurance coverage to handle the damage.

Many hopeful borrowers are in need of something beyond a traditional mortgage.  The lease-to-own model is a good way for sellers and buyers to reach their intended goals.  However, sellers need to be especially careful in these deals to make sure their interests are protected beyond merely the sale of the home.

Original Post - Rent-to-Own Minimizing Risks

Avoiding Problems with Your Escrow Account

Avoiding Problems with Your Escrow Account

If you are using a mortgage to purchase your first home it is highly likely that the lender will request that you use escrow in order to handle the annual homeowner's insurance and taxes on the property. This is reflected by an additional payment on top of the interest and principal payment that you make on the home loan. Ideally, the lender will review this account every year to see if there are overpayments or underpayments and change the escrow accordingly.

Unfortunately, we don't live in a perfect world and companies do make mistakes. Here are some important facts to help you understand the basics of an escrow account.

Taxes

Property taxes are usually reviewed one year after a home has been purchased. At this time the property will likely get a new assessment, which can drastically increase the tax amount. For people that are buying a previously owned home this will usually not be an issue, although you should look at what the current assessment value is. If you are buying a brand new home, or if you have just built a home, then the previous tax amount was based on an empty lot. The existence of a new home will greatly improve the lot's value and subsequently change the tax amount.

Insurance

Before finalizing the loan you will be asked to provide proof of insurance from a licensed insurance agent. The location of your home may dictate a few extras that might not be prevalent in other areas.

For instance, if you are considering the purchase of a home that is close to a river or lake then you may be in a flood zone and subject to flood insurance. Homes that are located in extremely rural areas may be subject to higher premiums if there are no fire fighting stations in close proximity to the home. It is vital that you speak to your Realtor® before buying a home to see if there are any conditions about the home that would result in a higher insurance policy.

Reviewing the Escrow

Every year your lender should mail you a letter that goes over the escrow account for the previous year. It should list all of the payments you made to the escrow account as well as any amounts disbursed from the account to cover your expenses. You should also contact your homeowner's insurance agent and the local tax assessor's office to see if there are any upcoming changes for your tax bill or your insurance bill.

How to Handle Property Tax Increases

Going back to the early example of someone buying a new home or building a home, there is the expectation that the property tax amount will increase tremendously. If the increase is more than $1,000 then the lender will possibly add $2,000 to the escrow account in case the taxes increase again the following year. This presents you with three choices:

• Accept the new escrow amount and pay the additional $167 monthly amount
• Ask your lender if they will spread the extra amount over the next two years to make the monthly amount lower
• If you have the funds, offer to pay the increased tax amount yourself so that your escrow payment does not change.

Escrow Account Problems - Original Post
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