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Thread: Rent to own your home/ Lease or Purchase options

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    Featured Member Tourdefranzia's Avatar
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    Default Rent to own your home/ Lease or Purchase options

    I know there are some very wise people here when it comes to finances. A company approached me this week about finding buyers/sellers for rent-to-own properties. The housing market in Portland is insane at the moment, with rents going up 25% or more per year. The city is waiving building permits of all kinds to try to encourage new construction, and it appears to be working, but not nearly fast enough. Homelessness is increasing and people who earn less than $50k a year are being pushed out of the region altogether due to the high cost of housing.

    So here's the deal with this rent-to-own company: A buyer/renter will find a house that is currently for sale, with a market value of up to $650k. The buyer must first pass a $75 application process, which assesses debt to income ratios, income and criminal background check as if they were applying for any apartment complex. Once they have been approved, they are given a purchase approval up to $XXX,XXX and I will begin showing them properties that are currently for sale that they can make offers on.

    Once the offer is accepted, the buyer/renter enters into a contract with the investor as a lease option agreement.

    • Must rent for 1 year minimum before exercising the option to purchase.
    • Rent increases are capped at 3.75% per year for 5 years. (Portland has seen double digit rent increases for the last 4 years with no relief in sight).
    • The purchase price of the home will increase 5% per year or at market rate, whichever is lower, until the renter either decides to buy or moves away.
    • The purchase price of the house is calculated based on:
      1. Actual purchase price
      2. Plus closing costs
      3. Plus repairs completed prior to moving in
      4. Plus 5% for each year after the first year the option is not exercised.

      Obviously, this is not the most cost effective way to buy a house. I think for certain individuals who can prove a high income but don't have enough saved to qualify for a conventional loan or have too high of a debt-to-income ratio, this may be a good choice if for no other reason than the cap on rent increases year over year.

      I also feel like the adult entertainer community could benefit from this program as a lot of us don't file our taxes. This makes it difficult to prove your income and therefore difficult to qualify for a mortgage. That way, a person can move into the house they want right away and begin working toward getting to a place where they can qualify for a mortgage.

      So, what am I missing here? Aside from this being a pretty expensive way to buy a house, do you see any red flags here?

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  3. #2
    God/dess KatyBoleyn's Avatar
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    Default Re: Rent to own your home/ Lease or Purchase options

    If you're not filing your taxes, how are you going to get by the background check for underwriting for the purchase option? Suddenly having a house to your name will attract IRS attention even if you get by all that.

    If the rent control aspect is iron-clad, this system may have some use. Other than that, for purchasing I'm not seeing the benefit.

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    Default Re: Rent to own your home/ Lease or Purchase options

    So this is for people that cannot get a loan for a house today but in 1 year will be able to? Is the investor giving them a land contract or other type of loan if they choose to buy the house after 1 year? Wouldn't they just rent normally for another year and then purchase when they're ready?

    If you're worried about the housing market going up quickly and need more time to get a loan, I suppose this would cap the purchase price increase to 5%.

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    Featured Member Tourdefranzia's Avatar
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    Default Re: Rent to own your home/ Lease or Purchase options

    Quote Originally Posted by KatyBoleyn View Post
    If you're not filing your taxes, how are you going to get by the background check for underwriting for the purchase option?
    You only need to prove to the company that you can afford to rent the house. The buyer/renter's name is not on the deed.

    And, yes, the rent control is capped at 3.75% per year. The purchase price of the home goes up 5% every year.

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    Featured Member Tourdefranzia's Avatar
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    Default Re: Rent to own your home/ Lease or Purchase options

    Quote Originally Posted by NoRegrets View Post
    So this is for people that cannot get a loan for a house today but in 1 year will be able to?
    That is exactly the kind of person the investment company has in mind. For instance, someone who just started a new job, doesn't have sufficient funds for a down payment, debt-to-income ratio is too high etc.

    We also have a shortage of available rental stock in Portland, and this program gives renters the ability to select their rental home from the MLS, with rent increase controls for 5 years.

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    Default Re: Rent to own your home/ Lease or Purchase options

    When do you get paid?
    What happens if deal falls through after 6 month, or a year, or more. Will you be liable to the "investor" for your commission?
    What assurance is there the "investor" owns the property?

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    God/dess Zofia's Avatar
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    Default Re: Rent to own your home/ Lease or Purchase options

    The investor locks in 5%+ return on his investment. Not many investments lock that in with little risk to the principal. The repairs in #3 are usually the seller's responsibility, or the purchase price is reduced by the cost of those repairs. It looks like those are getting transferred to the buyer. $75 application fee looks like pure profit for the investor as closing costs usually include the "application fee." Double counting? Criminal background check to buy a house? That's not normally something a bank will be too concerned about if you have verifiable income. It looks to me like this is more of a lease disguised as owner financing. Buyers would be better off to go through a credit union, savings and loan or even a conventional mortgage broker. If they can't qualify, then it's probably better to rent for a year or two, get their finances in order and reapply through more conventional sources.

    Also, see slowpoke's comments above. When you get paid and the title issues are big old red flags in my book. The thing I learned about flipping houses is it is good until it isn't. I'm glad I liked the place I ended up with at the end. Otherwise, I'd have taken a beating and had no nice place to live.

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    Default Re: Rent to own your home/ Lease or Purchase options

    I work in the real estate industry and am familiar with this program (these types of programs) though it may be a different investor. #1 there would not really be a "red flag" that you own a property and do not file taxes. The federal government does not interact with the local county government in this manner, unless they are attempting to place a tax lien on your house. The only reason the IRS would ever know if a person was trying to buy a house would be if the buyer was applying for a mortgage and the mortgage lender faxed a 4506T form to the IRS to get copies of your tax transcripts. There are loan programs that will lend based on your bank statements if you have a hefty down payment (usually 20% but can be as low as 10 or 15%). Many people who are tax exempt (for instance, on SSI/retirement/ VA benefits ONLY), are foreign nationals or receive child support and/or alimony as their only source of income are all allowed to purchase property and even qualify for a mortgage. As far as the "repairs" they generally will not cure code violations as this would be the responsibility of the seller but they will fork out the money for improvements an upgrades and then tack it into the purchase price (which you are paying interest on so the prudent thing to do would be pay cash yourself). As a personal aside- if you girls and guys are not filing taxes you should really start. For one, there are tax benefits to owning real estate and #2 if you want to qualify for a traditional loan product and not a bank statement or hard money program you will need tax returns. You can back file several years of taxes at once. You can also file a "loss" for several years in a row if you do not want the liability of having to pay back taxes, but please be prepared moving forward to pay taxes. If you live in the United States it is a reality of life here. Uncle Sam will ass fuck you with no lube and it is not a joke. They will clear out your bank accounts and garnish any wages of future jobs or settlements and in theory (although it rarely happens) can seize assets including cars, furniture, clothing and whatever else they wan to.

    I understand where you guys that do not file taxes are coming from. I only danced for I want to say 5 or 6 years. When I wanted to go back to school I needed taxes for financial aid so I filed that I made very little money and filed three or four years at once. I didn't end up paying anything. This year is the first year in a while I have paid taxes but I am glad because at some point you really do have to. I also own a home and am trying to buy a second property. I don't want to get into it too much besides that but if anyone has questions regarding mortgages PM me; I can not give advice on taxes as am I not an accountant.
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    Default Re: Rent to own your home/ Lease or Purchase options

    HUGE risk in this type of transaction - laws vary by state BUT - I know of to many horror stories of renter/lease purchasers losing everything when the "owner/seller/deed holder " loses the house because the deed holder/owner quit making the payments and the bank foreclosed - leaving you the renter fucked - to put it nicely - no refund of deposit and no rights to the house -
    If you do chose to go forward with this consult a real estate attorney to go over your contract/lease to hopefully minimize the potential damage or keep you out of a bad situation -
    these transaction are also used as a ploy to get a big down payment plus rent from people who in all likely hood are going to forfeit the deal leaving the owner / seller to do it all over again to the next person - selling the same house over and over again - my state attempted to halted these predatory lease options by limiting the number a person/business can do in one year to three

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    Default Re: Rent to own your home/ Lease or Purchase options

    Quote Originally Posted by Nikki_Fox View Post
    HUGE risk in this type of transaction - laws vary by state BUT - I know of to many horror stories of renter/lease purchasers losing everything when the "owner/seller/deed holder " loses the house because the deed holder/owner quit making the payments and the bank foreclosed - leaving you the renter fucked - to put it nicely - no refund of deposit and no rights to the house -
    If you do chose to go forward with this consult a real estate attorney to go over your contract/lease to hopefully minimize the potential damage or keep you out of a bad situation -
    these transaction are also used as a ploy to get a big down payment plus rent from people who in all likely hood are going to forfeit the deal leaving the owner / seller to do it all over again to the next person - selling the same house over and over again - my state attempted to halted these predatory lease options by limiting the number a person/business can do in one year to three

    This to me sounds something like what a trailer oark does


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    Default Re: Rent to own your home/ Lease or Purchase options

    What is a trailer oark?

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    Featured Member Tourdefranzia's Avatar
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    Default Re: Rent to own your home/ Lease or Purchase options

    Quote Originally Posted by slowpoke View Post
    What is a trailer oark?
    A typo.

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    Featured Member Tourdefranzia's Avatar
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    Default Re: Rent to own your home/ Lease or Purchase options

    Quote Originally Posted by slowpoke View Post
    When do you get paid?
    What happens if deal falls through after 6 month, or a year, or more. Will you be liable to the "investor" for your commission?
    What assurance is there the "investor" owns the property?
    As a licensed real estate broker, I would be representing the investor in the purchase transaction and would be paid my commission as usual out of escrow. The investor does not pay my commission, the seller does.

    The investor then turns around and rents the property to the renter I've been assisting. The purchase terms are agreed upon before closing of the original transaction as part of the lease option agreement.

    There are 3 parties involved in the transaction: The seller, the investor, and the renter. I assist the renter in finding a property from a pre-approved list of neighborhoods. Once the renter has passed the background check and been approved as a tenant by the investor, the renter selects a house that is for sale from available inventory. Then I submit an offer on the property from the investor. Once the sale has closed the renter will move in and begin their 5 year lease option agreement.

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    Featured Member Tourdefranzia's Avatar
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    Default Re: Rent to own your home/ Lease or Purchase options

    Quote Originally Posted by whirlerz View Post
    This to me sounds something like what a trailer oark does
    I know someone who does that. He's a shady individual.

    The program I'm considering is a multi-billion dollar investment trust and buys property in 11 different metro areas around the country.

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    Default Re: Rent to own your home/ Lease or Purchase options

    I guess I missed the part where you are a licensed broker. I thought you were considering a personal purchase under this program. I would consult an attorney and your board to clarify what your liability would be - especially if anything that I mentioned happened - your license could be at risk if you get sued.

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