So, you have some income, but you messed up your credit a few years back and with a couple of repossessions and a foreclosure, you think you’ll never own a home again. How could it get worse?
Well, one way to make it worse is to fall into a predatory “Lease/Option” scheme with an unlicensed Seller.
You’ve seen the signs advertising, “No Bank Needed! No credit check! $2500 + $1100/month Lease Option. FSBO. No Realtors, Principals only.”
It is one of the hottest marketing areas in real estate.
Lease Option can be done “right,” offering homebuyers an alternative path to homeownership.
It can be done “wrong,” creating added heartache for the eager and unsuspecting buyer.
How would you recognize a predatory Seller?
If the Seller discourages you from doing anything in the following list, consider running away really FAST:
•1. First and foremost: A REALTOR(r) can help negotiate, but in North Carolina, a REALTOR(R) is not able to write a Lease-Option contract. Hire a good real estate attorney to write the contract and/or review any documents, and tell you what they mean, and how you may be affected. Ask if he/she should or will hold in trust your deposit and any of your monthly payment that is earmarked for your down payment. A good REALTOR(r) can help you find a good real estate attorney.
•2. Pay a licensed home inspector to do a full report on the home.
•3. Pay for a termite inspection.
•4. Have your insurance company check the home for insurability.
•5. Check that proper permits have been pulled and city/county inspections performed for any work that requires permits.
•6. Have the contract stipulate you will not pay more than the value set by a licensed appraiser, at the time you will be closing. Your lender will require that anyway. Valuations from fluff websites like Zillow, or the tax value are NOT acceptable substitutes.
•7. All of the above should be done by professionals YOU select, not the Seller’s attorney, inspector, or appraiser.
See, with all the “Flip thisorthat House” scandal entertainment on TV in the past; a lot of amateurs, and worse people than amateurs, have jumped into the business of real estate “investing.”
Often dilapidated homes are poorly rehabbed with unskilled cheap labor, no permits, and minimal disclosure regarding systems and conditions. You may be told, “You don’t need an inspection. We have been over this place from one end to the other.”
GET IT INSPECTED!
You can find L/O Sellers in online real estate investment forums crowing about how they don’t care if the L/O Buyer ever gets financing, because after the lease period, they may get to keep the “deposit” and the “extra” monthly payment. And often they are in agreement that if they do close the transaction, it is all right, because the house is overpriced anyway!
And for that year or two, they basically have a tenant who cares for the property with pride of ownership. This is not set up as a “win-win,” but as a “No-Lose” proposition for the predatory “Investor.”
And what if things go well, you apply for a mortgage and the house, which is probably well overpriced, doesn’t appraise after the 12, 18, or 24 month lease period? Where is your deposit and “extra” money? Your attorney who writes the contract can help you answer that question.
Avoid Lease/Option Heartache! Sometimes it is better to rent!
More on Lease/Options:
What else do you need to know? Work with an attorney of your choice when entering into a lease-purchase arrangement.