Per Wiki:
Seller finance or "subject to"
Seller financing can refer to one of two things:
1.The seller can act as a bank and rather than receiving all or a
portion of their equity at close, they can "lend" it to the buyer and
receive a regular payment as agreed. They may receive no payments,
interest only payments, principal only payments, or a combination. It
could be an interest only loan, or an amortized loan. Additionally it
could carry either a fixed rate interest payment or a variable rate.
These will vary depending on the agreed upon terms of the contract
between the buyer and the seller.
2.The seller can allow the buyer to "take over" the loan that he or she
has in place. This can be done in two ways. The first way is called an
"assumption", wherein the lender formally allows the buyer to assume the
loan. This entails approval of the buyer's credit, and often a
modification of existing loan terms. The other method is called a
"subject to" where the lender is not contacted, and the buyer purchases
the property "subject to" the existing financing. This can be
financially risky in many ways, since many loans have acceleration
clauses which permit the lender to call the loan due if the property is
transferred. However, more often than not the lender will not exercise
the "due on sale clause" if the payments are being made on the
underlying mortgage(s). In the rare event that a lender does call the
loan due then an investor could quickly sell the property or pay off the
loan using any one of the various financing options available, some of
which are described below.
[edit] Options
Main article: Option (finance)
An option is defined as the right to buy a property for a specified
price (strike price) during a specified period of time. An owner of a
property may sell an option for someone to buy it on or before a future
date at a predetermined price. The buyer of the option hopes the value
of the property will either go up or is already low. The seller receives
a premium called "option consideration". The buyer may then either
exercise the option by buying the property or sell the option to someone
else to exercise (or sell). This is often done to obtain control over a
property without much cash. Option premiums are typically
non-refundable. The option represents an equitable interest in the
property and may be recorded at the county recorders office.
[edit] Lease option
Main article: Lease-option
This is made up of two parts: A lease, or rental agreement, and an
option. They may be written together as one contract or as two. The
Lease is simply a rental agreement between the owner and the potential
lessee (tenant). Often these leases will be "triple net lease" leases
(NNN) in which the lessee is responsible for paying for the taxes,
insurance, maintenance, and upkeep of the property. The lease payment is
typically 5-15% higher than rent might be for the same property. This
type of lease can be structured so that the lessee can take the tax
benefits as if he were the home owner.
===
Per guru:
When to Use Lease Option vs. Getting the Deed
by Wendy Patton
Acquiring investment real estate can be handled with many approaches.
Two very popular "no money down" approaches are lease options and
"subject to," or "getting the deed."
A lease option is a technique that involves gaining "control" of a
property, but not ownership--just the right to possess a property now
and purchase that property at some future date with terms you define
today.
A "subject to" is getting the deed to a property without getting a new
mortgage. Instead, the seller signs over the deed to his or her home
"subject to the existing financing" staying in place. The buyer in this
case makes the mortgage payments on the old loan, but does not get a
mortgage themselves to acquire this home.
Both of these techniques usually require little or no money down. In
both of these techniques it is possible for the buyer to get money from
the seller or the purchaser (or both) in the beginning of the
transaction. These techniques, when used properly, can provide for huge
profits. They are awesome strategies and when used hand-in-hand, are
almost an unbeatable pair!
===
More per guru:
Lease Option vs. Subject Tos
by Wendy Patton
Lease Options and Subject To, A.K.A. “Getting the Deed” are two very
popular ways to purchase real estate with little or no money down.
Acquiring investment real estate can be handled with many different
approaches, but these two techniques can be implemented with little or
no money down in most incidences.
A lease option is a technique which involves gaining ‘control’ of a
property, but not owning it. It is the right to possess a property now
and purchase that property at some future date with terms you define
when you buy it.
A “Subject To” is getting the deed to a property without getting a
mortgage for the home. Instead, the seller signs over the deed to his
home ‘subject to’ the existing mortgage. The buyer in this case makes
the mortgage payments on the old loan, but does not need to get a
mortgage themselves to acquire this home.
Both of these techniques usually require little or no money down. In
both of these techniques it is possible for the buyer to get money from
the seller or the purchaser (or both!) in the beginning of the
transaction. These techniques, when used properly, will provide for huge
profits. They are both awesome, and when used hand-in-hand by investors
are almost an unbeatable pair!
This short article is not meant to give details of each technique, but
rather to show when you could consider either of them. If you don’t
understand how to document and protect yourself in each kind of
technique, then purchase a home study course or my book called
‘Investing in Real Estate with Lease Options and Subject Tos’. It can be
found on my website – www.WendyPatton.com.
Why Knowing Both Techniques Means More Great Deals For You!
Unfortunately there are many people that are teaching that you should
only do the Subject To – technique. They recommend never buying on an
option. I can’t tell you how many times I have heard, “If I don’t get
the deed, I don’t do the deal”. With over 20 year’s of experience (since
1985) doing both types of deals, I have to disagree with that
statement. The more tools and techniques and ways you have to purchase
property or to structure a deal, the more likely you will be able to
work with a motivated seller to come to a potential solution. If you
only buy “Subject To”, you’ll walk away from a LOT of great deals in
your real estate career, but you must know when each technique is
appropriate to use.
Finding a motivated seller is the first step to any good real estate
deal. There are many types of motivated sellers, but we tend to think of
motivated sellers as the ones that are financially distressed. I like
to look at motivation from a much wider range. Let me explain. I like to
divide motivated sellers into two groups:
Sellers That Have Bad Debt vs. Sellers That Have Good Debt
Sellers that have “Bad Debt” are those in financial trouble. They might
be behind on a mortgage, have lost their job, acquired an illness, going
through a divorce, etc. In these situations, you need to get the deed
either with a Subject To or an outright purchase. Your main concern is
that this type of seller will continue to have financial problems that
could affect the title to “your” property if the deed is still in their
name. For example, if this seller gets judgments from creditors, they
can attach to any real estate the seller owns - they will have to be
paid off before you can exercise your option to buy. That’s why you want
to get this type of seller off of the title.
Sellers that have “Good Debt” are those NOT “in trouble” in the
traditional sense, but they do have a reason motivating them to sell.
Their problem is not one of financial desperation—it is usually just a
change in their life. They might be transferring to a new location for a
promotion, getting married (each owning their own home), building a new
home, burned out landlords, etc.
Example #1: Here is an example when you MUST get the deed:
A seller calls you on the phone and says he is 2 months behind on
payments. Do NOT option this home! This seller is in trouble financially
and is not a good risk for an option. Anyone that is in a bad financial
situation is not a good seller for an option. This is the type of
seller that you must get off of the deed so that his financial situation
will not affect the title to the property in the future.
Not every seller who is in financial trouble will tell you so, which is
why you ALWAYS need to do research on the title before you get the deed
or do an option. In this case, you will need to bring the seller’s
mortgage current. Before you do, you want to make sure that he is owner
of the property and there are no other liens on the property.
Example #2: Here is an example when you COULD get the deed:
A seller calls you who owes $135,000 on his home—which is worth
$135,000. Since there is no equity at all on this property, this type of
seller might very well be willing to give you the deed. If there is
high appreciation in the area, or a very low payment, you might be able
to make a profit even though there’s no equity. However, be careful that
you have evaluated the numbers correctly before you take the deed.
On the other hand, if the seller’s payment is too high or the market is
slow, you might need to have the seller pay you to take the deed. Yes,
there are sellers who will pay you to take the deed to their home. Think
about it: if this seller sells conventionally—that is, though a
Realtor, he would have to pay up to $10,000 in commission to sell his
home. Plus, he’ll have closing costs, transfer taxes, and will probably
pay points or fees on behalf of his buyer. If he’s willing to pay all
this money to an agent to sell the property and wait 90-120 days to
sell, why shouldn’t he just pay you to take over his payments NOW?
If the seller didn’t have the cash to give you, an option would be your
best strategy. This way, the seller can pay you the $10,000 over time,
or you could arrange for the seller to pay part of the monthly payment
during the option period. This way, if he stops paying his portion of
the payments, you have the choice of surrendering your option and simply
giving the property back to him. When you have the deed, you normally
can’t do this.
Example #3: Here is an example where you SHOULD lease option or lease purchase:
A doctor has a new home built for himself. His old home is worth
$200,000 and he owes $125,000. He has $75,000 of equity. He is not
behind on payments, and he did not need the $75,000 of his equity to buy
the new home. His old home is sitting vacant and the realtor has not
sold it yet. He qualified for both house payments at the bank and he can
technically afford both, but who wants to make an extra house payment?
Although he is motivated to sell because he’s coming out of pocket every
month to own a vacant property, this type of seller is NOT going to
simply give you the deed and let you take over the mortgage. There is no
way is he going to give up all of his $75,000 in equity, and no way are
you going to pay that much cash out of pocket.
When you lease option this house, he gets most of his equity
back—although it won’t happen until YOU sell the property. The deal
might work like this: you option the property for $195,000, and make
payments to the seller that equal his total mortgage payments. You SELL
the property on an 18 month lease option for $228,000 with payments to
match. You get cash flow + $33,000 in profit when your tenant/buyer buys
the property; the seller gets his payments taken care of for a few
years, then gets the bulk of his equity out. And in the meantime, he
doesn’t have to worry about management, vandals, frozen pipes, and all
of the other things that owners of vacant houses have to deal with.
Example #4: Here is an example where you COULD lease option or lease purchase:
A seller just inherited a property worth $120,000 from their parent’s
estate. It is owned free and clear and they don’t want to be paid off.
They don’t need the cash, but they would love some cash flow on this
asset. This seller is not going to give you the deed. Let’s say you can
lease option this property for $700 per month with $300 per month going
to the purchase – or the option credit. Your real payment in this case
is only $400. You can compare these numbers with doing a seller financed
type of arrangement. See what works the best and make that offer first.
Let’s examine a seller financing deal:
A seller financed deal means that the seller will finance a mortgage for
the buyer and the buyer pays their mortgage payment/interest to the
seller versus a bank. This is primarily done when the seller owns a home
free and clear and they do not have a mortgage on it themselves. It can
be called a land contract, contract for deed, or private money
mortgage. It will depend on how the offer is made and accepted. Let’s
say you negotiate a deal with the seller for a sales price of $110,000 –
if you want your payment to be $700.00 as in the above lease option
example, let’s see what that really means to a seller for a seller
financed deal. First in a seller financing or mortgage your payment
includes taxes and insurance (unless the buyer pays them themselves).
This must be subtracted from the $700. Each part of the country
fluctuates, so I will use an estimate of $250 per month for taxes and
insurance. This leaves $450 for the seller. Now we must subtract our
principal we negotiated above the $300 per month credit. This now leaves
the seller with $150 per month. If this were to be all that is left
this would essentially mean the seller is receiving 1.6-1.7% interest on
their money. The interest rate has to be disclosed on the loan document
or seller financed deal. A very low interest rate is much harder for a
seller to accept then a lease option payment of $700 per month. It is
the same thing to the seller, but it is spelled out differently. They
don’t do the subtraction themselves to calculate the real rate of
return. If you do a seller financing deal, you must calculate and show
it in writing. Compare the two and see what works the best.
Let’s examine the pros and cons of Subject To vs. Lease Options:
Subject To Pros:
Title is in your name – full ownership.
Some sellers will pay you to take the deed.
Easier to prove ‘seasoning of title’ – when you are the title holder. Easier to refinance.
If you are on the title you will have long term gains vs. short term if you hold the home for longer than 12 months.
Subject To Cons:
You own it and have ethical responsibility to the seller even if the
market changes or you can’t sell the home. You own it! No changing your
mind on this one.
You will need to get new insurance policy naming you or your company on
the policy. In some instances this might trigger the ‘due on sale’
clause. You must insure it based on the title (who is the owner) or you
will have no coverage.
In some states mortgage brokers and realtors could be fined and/or
subject to revocation of their license. It could be considered against
their code of ethics to assist a person in violating a clause in a
contract (due on sale clause).
Sellers with lots of equity will be hesitant or completely against
giving the deed. Sellers who get legal advice will almost always be
against giving the deed to their home. Attorneys tend to be
conservative.
Lease Option Pros:
You don’t have to buy later – if the market drops or there is something
wrong with the home. You can get out! If it goes up you can exercise and
purchase the property. If the market stays flat you will have a choice
of what to do.
More sellers will do an option vs. giving up a deed – especially on ‘pretty’ homes.
After 12 months of payments there are many lenders that will treat a
lease option as a refinance – as if you were on the deed. It would be
treated like a land contract or contract for deed refinance.
A way to get nicer homes. It is more likely the seller that is not
behind has taken better care of their home. This type of seller is also
more likely to consider a lease option vs. signing over the deed.
Seasoning of title will start when you file a memorandum of option or
lien of interest. Most lenders will consider this adequate and similar
to recording a deed (with the exception of FHA or possibly some other
lenders).
Sellers with lots of equity are more likely to give you the right to buy
the home than they are to give you the deed to their home.
Lease Option Cons:
Title is NOT in your name – seller could screw it up – must be careful
to screen the seller. Only option from strong sellers, not those in
trouble or headed for trouble. (unless you put the deed in a land trust)
You will have short-term capital gains vs. long term if you are not on
the title. This can be avoided if you finance it with the 12 months of
payments (see the pros) and get on the title and hold it for 12 months
before closing with your tenant buyer. This is a minimum of a 24 month
solution.
Some sellers might feel like an ‘option’ is not closure on their home.
Some sellers will feel better with a deed being transferred or a lease
purchase (which is a guarantee vs. an option).
Sellers with lots of equity usually want to close and get their equity out.
Warning:
There are many factors to consider when making an offer with either of
these techniques. What is the current market condition for real estate
in your area? Are homes appreciating, depreciating, or staying flat?
What is the financial condition of the seller? Are they moving up or
down financially in their new home? All of these items make a huge
difference on how you will structure a deal. I always say, “Strong
market – make a stronger offer. Weak market – make a weaker offer”.
Do your research, but if you keep your mind open to new ways of
acquiring real estate, you will indeed make more money! Try using
Subject Tos and Lease Options.
===
purchase option is totally different from lease option or lease-
What are Options On Real Estate or Real Estate Options?
A real estate option gives you 'control' of a piece of real estate WITHOUT BUYING IT! By having Options on Real Estate, you have the exclusive right to either buy that property, or NOT to buy it. The choice is yours.
It is an 'exclusive' right. That means that NO ONE ELSE can buy
or sell that property during the term of your option. If that isn't
'control' I don't know what is.
And (in most cases), the owner keeps paying all of the inherent
costs of the property taxes, assessments, upkeep & maintenance.
What could be better than 'controlling' a real estate empire
WITHOUT BUYING ANY REAL ESTATE? Let the owner keep paying the inherent
costs. And, either 'sell' the property, or 'sell' the option itself, for
a profit.
If the seller sells the property to someone else, while you
hold this exclusive option, you are entitled to any monies the seller
receives over the price you have agreed to pay for the property or if
the seller sells the property for less than what he agreed to sell it to
you on your option, you can collect the difference from the seller.
===
Yes or no:
purchase option give you the first right to buy, it used often when a
developer wants to buy a big piece ground, if the the acquisition can
not finish, developer then just let the option expire without any
further obligation on purchases.
lease option is the above plus a rental lease..
