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On the Fence About Home Purchase? Look at Rent-To-Own

On the Fence About Home Purchase? Look at Rent-To-Own
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There are a great many people sitting on the sidelines when it comes to a home purchase. There are plenty of valid reasons for their hesitation:

• Can’t get the down payment together.
• Credit score needs improvement.
• Younger first time buyer has college debt.
• Younger buyers living with parents with fewer good jobs available.
• Concern over current employment.
• Younger buyers saw relatives lose homes to foreclosure; hesitant to buy.

Whatever the reason(s), there are many people out there who may want to own a home now but can’t pull it all together in the short term. They understand that waiting could saddle them with a higher mortgage interest rate, but it’s a risk they feel they must take in an uncertain market.

Lease Purchase or Rent to Own – What is It?

In a lease purchase or rent to own deal, the seller leases the home to the tenant-buyer for a specified period. On or before the end of that period, the buyer has the OPTION, not the OBLIGATION to purchase the property. In other words, the tenant-buyer pays the lease every month and at some point can exercise their option to buy at a pre-determined price. That price can be a set dollar amount when the agreement is signed, or could be something like “at the appraised value as appraised by …….(jointly acceptable appraisal company).”

Buyer Benefits & Investment

The tenant-buyer gets to contract for a home they would like to own. The can take the time to rebuild credit and gather a down payment as well. These agreements are typically for three to five years in length. Remember that the buyer can simply move out at the end of the lease with no obligation to buy. However, if they’re serious about wanting to own the home and believe they’ll make it happen, they can do some improvements for their future benefit.

There is a cost for this option. It’s the option premium, a set amount of cash on the front end. It will be much less than a down payment, but it is non-refundable no matter what the outcome of the arrangement. In other words, if the option costs the buyer $ 2,500, they will not get that back, and the seller gets it and can spend it on the front end. The good news is that often the option cost is not much more than the first and last month lease requirements for a regular rental.

If you shop hard, you can find a highly motivated seller who has a need to move but hasn’t been able to sell. This gives you a better negotiation position with regards to the future purchase price. You taking over their mortgage payments as a lease frees them up to move on with their lives. They of course must understand that they could end up with their home again at some point.

Seller Benefits

The seller who may have been unable to sell but needs to move for better job opportunities or other reasons can do that. The get a moving stake in the form of the option payment. The set the lease payments to cover their mortgage, so they don’t carry away monthly dollar obligations. Of course, they want to carefully check out their tenant-buyers to be sure they’re good rent payers.

Sellers can also usually expect that better care will be taken of the property. The tenant-buyer intends to own the home at some point, so they take better care of it than a normal renter would. The agreement could also make them responsible for normal repairs, unlike the normal lease. Sellers like this as well.

Care in the Arrangement

Laws vary by state as to whether you can do this and how. Some lenders, if they find out, may call the loan due, but it’s rare that this happens, as it’s really just a lease with an option at the end. Few mortgages preclude leasing out the home.

Work with an attorney acceptable to both sides and examine the lease documents carefully. They should be fair to both parties.


Dean Graziosi

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Weekly Video Blog #102

Weekly Video Blog #102

Weekly Video Blog #102

Visit http://deansacademy.com/ Welcome to Dean’s Weekly Video Blog as we talk about how to make profits in today’s real estate market… This week you’re goi…

http://www.youtube.com/watch?v=-oYO_OBQFpE

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Fix & Flip for the Retail Buyer

Fix & Flip for the Retail Buyer
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Fix & flip real estate investment has been a popular strategy throughout the period from the crash in 2007 right through the present. This has been primarily due to the availability of bargains, mostly foreclosures in need of rehab and repair before sale. However, the majority of fix & flip investors have been selling mostly to other investors, rental property buyers at the head of the line.

There are solid reasons for this trending investment strategy. The crash pushed a whole lot of people out of their homes. Lenders became tougher in approving mortgages. The economy hasn’t been great when it comes to good jobs for college grads. Even when they can get a job in their chosen field, there is a lot of concern about keeping those jobs and seeing pay raises in the near future. All of these factors have been pushing people into rental units, and rents are rising around the country.

Prices are rising due to competition in the foreclosure market and investors are having to work harder to get those bargain buys that feed the fix & flip strategy. There are still good deals out there that will cash flow as rentals though. But, are there housing and economic factors that could make fix & flip for retail more appealing? It’s been tougher in the past, as there are higher costs of marketing and real estate commissions in many cases.

The news these days is all about the continued lack of interest from first time home buyers. Many in the millennial generation are still living at home or they’re renting. High student debt and low cash savings for down payments are part of the problem. There is also a general lack of interest, as younger generations don’t see a home as the investment opportunity their parents enjoyed.

Recent improvement in the employment picture could bring about some renewed first time home buyer interest. Lower down payment loans are surfacing again. In some markets new home builders are building starter homes and subsidizing down payments and mortgage interest rates. Fix & flip investors may begin to see opportunity in their markets for retail sales. Profits can be appealing, as the retail buyer isn’t demanding a discount to market value like savvy rental property buyers. But, there are some new things to factor into a retail fix & flip:

Right home in the right location: Rental property buyers can have different location requirements, and retail buyers will want to live in stable neighborhoods with family-oriented amenities.
Home size & price range: There are two target markets here:
o Entry level first time buyer: This buyer will normally want a smaller and less expensive home. They may need to stay in lower price ranges for affordability. This will make the number-crunching more important, as the profit margin will be smaller than with larger or more upscale homes.
o Upscale or move-up buyers: This could be a really lucrative market for the fix & flip investor. Locating a foreclosure or home with repair issues in a neighborhood with higher priced homes will increase the profit margin potential. More upscale materials and finishes increase the profit in the rehab part of the deal.
Holding and marketing costs: Unlike having a waiting rental home buyer on your buyer list, selling at retail will normally take longer. It’s more difficult to entice a buyer before the rehab is complete, so longer time from purchase to sale is normal. As for marketing costs, some investors can do their own and sell direct, while others will use a real estate broker. Each of these approaches carries costs that aren’t part of a wholesale fix & flip deal.

If your market is beginning to see more retail buying activity, and if prices are rising, it could be time to move away from the wholesale mentality toward the consumer buyer.


Dean Graziosi

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Transactional Funding Is Alive and Well

Transactional Funding Is Alive and Well
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The average consumer may not have ever really thought about transactional lending or even what it is. When it comes to financing real estate, most activity and interest is focused on regular mortgages and their interest rates. However, investors have very different requirements, especially when they’re engaged in fix and flip or wholesaling.

So, what is transactional funding?

Transactional funding is very short term lending to facilitate a real estate deal. Fix and flip investors and real estate wholesalers both need this type of funding unless they happen to be cash rich. Let’s talk about wholesalers first. They normally locate deep discount properties that they can flip to another investor without any rehab work on the property. They are profitable only if they are very good at locating distressed owners or foreclosure/pre-foreclosure properties before the competition gets wind of them.

If they want to totally control the property and increase their profit, they enter into a purchase contract and actually commit to buy the property. They have their buyer lined up, usually another investor, perhaps a rental property buyer. Their goal is to commit only the earnest money required by the seller to lock up the purchase, and then they want some transactional funding to close the purchase. They schedule their buyer’s closing later the same day or maybe the next day, and the transactional funds are required to actually buy the home so that they can sell it at the second closing.

The transactional lender provides the funds to buy the home at the first closing, and they collect their fees and get their loaned money back at the second closing. Fees are substantial, and many deals require somewhere between $ 2,000 and $ 5,000 in interest and fees for the use of the money for the short period between closings. However, the wholesale investor can normally get more for the home in this type of transaction, and they factor those fees into the deal when they offer it to their investor buyer.

The fix and flip investor has a very different time span for their loan, as they are going to take ownership of the home and then complete rehab and repairs on the home before it is sold, again, normally to another investor. Fee structures change a bit, and the short term lender may charge lower fees, but their profit is increased by the interest on the loan until the home is sold. This can be for weeks or months while the work is completed. Even if the cost of this type of loan is high, fix & flip investors, at least the good ones, enjoy higher profit margins. They make money on the home, as well as on the rehab work they do to bring it up to marketable condition.

Where do you find these lenders and what do they require for a loan?

Investors can locate transactional lenders through local real estate investment clubs, or a quick search on Google yields a great many companies in this business. One lender’s website makes the process sound simple:

This is simple. A one to three day, back-to-back real estate transaction funding involves three parties and two stand-alone closings.

“A” – Seller
“B” – Investor
“C” – End Buyer
“A” sells to “B” (AB Closing) and “B” sells to “C” (BC Closing)

This is pretty much how it works. The lender’s risk isn’t really tied to anything like the investor’s credit history or their personal debt load, unlike the normal mortgage lender’s concerns.

For wholesalers, transactional lenders are concerned with the value of the home as it exists when purchased. They will limit the funds loaned to an amount below value that will cover them should the final buyer (C in our example) disappear and the lender must take the property and sell it. For fix & flip investors, the lender will also consider the ARV, After Repair Value, of the home, as well as the experience level of the fix & flip investor and their previous successful deals. They will issue “proof of funds” letters for investors to use in putting deals together.

For people looking to enter real estate investing using short term strategies, transactional funding will be of interest, and there is plenty of availability for those who do their research. Carefully consider all of the terms and conditions, as well as the total of fees and interest.

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Dean Graziosi

Weekly Video Blog #129 – Are you Lucky?

Weekly Video Blog #129 – Are you Lucky?

Visit http://blog.deangraziosi.com/ Welcome to Dean’s Weekly Video Blog as we talk about how to make profits in today’s real estate market… This week, school is out. Dean Graziosi is…

http://www.youtube.com/watch?v=7eAx031GgDo

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Apartment Boom Bodes Well for Real Estate Investors

Apartment Boom Bodes Well for Real Estate Investors
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The National Multifamily Housing Council (NMHC) and the National Apartment Association (NAA) commissioned research to look into dollars and jobs generated by apartment construction, operations and resident spending.

The apartment industry and its 36 million residents contributed $ 1.3 trillion and 12.3 million jobs to the economy in 2013. Based on research by economist Stephen S. Fuller, Ph.D., of George Mason University’s Center for Regional Analysis, the data cover the economic contribution of apartment construction, operations and resident spending on a national level plus all 50 states and the District of Columbia. In addition, construction, operations and resident spending data are available for 40 specific metro areas.

Apartment construction is on the rise and contributed $ 93 billion to the economy in 2013. $ 30 billion of that went directly to paychecks for more than 700,000 construction workers. Spending, economic contributions and earnings all increased substantially in 2013. Apartment construction has been on the rise for five years. There were only 97,000 construction starts in 2009, the lowest level on record going back to 1964. By 2013 this number was up to 294,000 construction starts.

Each year 300,000 to 400,000 new starts are needed every year to keep pace with demand. Apartments have been chronically under-built for years, with only 186,000 apartment completions in 2013, about half what was needed to respond to demand. Years of backlogs mean that starts aren’t likely to hit necessary levels for a couple of years. Other highlights from the report include:

• Apartment construction spending, economic contributions and personal earnings are all on the rise.
• Apartment construction contributed $ 92.6 billion to the economy in 2013 and supported 702,000 jobs.
• The operations of the country’s 19.5 million apartment homes supported 1.5 million jobs, contributing $ 190.7 billion to the economy.
• In 2013, the nation’s 36 million apartment residents contributed $ 1 trillion to the national economy, supporting 10.1 million jobs.
• The combined contribution of apartment construction, operations and resident spending equals $ 1.3 trillion, or more than $ 3.5 billion daily.

Demand for rental units just keeps growing, and the growth of crowd funding could open up opportunities for small investors to get into the fray. However, apartments aren’t the only housing desired by renters. Single family homes will always be the preferred housing for many, especially households with children. The demographics of the single family rental pool are different in some respects. This is often due to the lack of single family homes in more urban and downtown areas where much of the employment is located.

However, smart investors will be trying to locate single family homes nearest to the top employers. Sometimes this will require rehab and upgrading of older homes near city centers, but it can be well worth the effort and money invested. Shortening the commute to work should be high on the requirements list for investors who want to rent to the younger generations, particularly those working in technology fields.

Prices have been rising, even for foreclosures and homes in need of rehab. Investor competition is the major cause, with large investment groups recently buying up groups of properties, especially near city centers. This doesn’t mean that deals can’t be found, just that due diligence will need to be more thorough, and the numbers will need to be carefully calculated for cash flow. Rental demand will help, as tenants will usually be willing to pay more to be located nearer to city amenities and their jobs.

Apartments are mostly transitional residences, with families forming and moving to rental of single family homes or duplexes before committing to purchase. Single family home investors can look forward to continued demand and rising rents in the near term, and possibly for years into the future. Even if rental demand begins to soften, that means there should be more buyers in the market, allowing investors to sell and upsize using a 1031 Exchange to lock in profits and defer capital gains taxes.
Dean Graziosi