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Las Vegas, NV Real Estate: Owner Will Carry (OWC) and Lease Options

This is a primer (not intended legal advice, just my astute market observations as a real estate licensee in the state of Nevada) for anyone who is looking to Purchase or Sell using one of these types of financing. This post was prompted by Jeff Turner's most excellent post in response to a FSBO. This is a MUST READ.

Definitions:

  • Owner Will Carry: Commonly referred to as "OWC". This means the seller will hold the note. Buyer usually must come up with a 10-20% down payment. Interest rates are usually higher than normal mortgages, depending on usury laws in your state.
  • Lease Option to Purchase: Commonly referred to as "Lease Option". This means that the house is currently being rented out with an option to purchase at the end of the term. Terms can be flexible. Option deposits range generally from 3-5%. Option deposits are generally: a)forfeited at the end of the option term if the option to purchase isn't exercised or b)applied towards closing costs or down payment if purchase option is exercised. This MUST be written in the contract!!! Monthly rental rates are generally higher than market rates and sometimes a portion of that rent gets applied towards down payment or closing costs.

For Sellers:

  • OWC: Base the down payment and interest rate (per your state's usury laws) on credit. SEEK THE ADVICE OF AN ATTORNEY and have the attorney write the note. As a Realtor, I would NEVER write a note myself or use a canned form you buy at a local office store! Treat this type of purchase as a souped up lease option. You also run the risk when changing title of new liens being added to the property. Make sure property use is clearly defined.
  • Lease Option: Make sure the option period is short and cannot be reassigned. Make sure price is clear. Make sure what happens to the lease option deposit is CLEARLY DEFINED in the contract. These should be treated like a LEASE and like a PURCHASE. There should be a leasing contract and there should be a purchase contract.

Thoughts and reflections on both of these financing types:

If you don't know what you are doing you will be preyed on by what I call "the unrentable". The "unrentable" usually have extremely poor credit and are living on (what I call) Noah's Ark. Noah's Ark means they have a plethora of animals and more than likely one or more of them are on "banned breed" insurance lists. Your insurance could be dropped and your home may become uninsurable on the C.L.U.E. report if your insurance company has banned an animal breed and they find out. Generally if these types of people were to do a normal lease or rental home, they would be required to double or triple their security deposits and their monthly rent could skyrocket. So their thoughts are "why not a lease option or OWC." They pretty much have to come up with the same $$$.

These types of transactions can be done with success. You just need the correct purchasers. The real reason behind a lease option would be someone who is speculating and doesn't want to risk in a declining market or they are new to the area and just want to test drive.

Lastly, make sure you DO NOT HAVE A MORTGAGE ACCELERATION CLAUSE in your note. Most lenders do NOT lend to allow this type of financing and you could possibly have your mortgage accelerated if they find out you are doing this!

For Buyers/Renters:

  • Get a lawyer and protect yourself from scams! I was bumping around on a major auction site (starts with an e) last week and was AMAZED at the amount of scams out there. I even checked title on some of them and what I found was atrocious!
  • Escrow the funds that are held as down payments and lease option deposits. Many homes in the Las Vegas area are getting foreclosed on and I would say a majority of people getting foreclosed on are renters. The best way to protect your deposits and down payments would be to have a licensed and bonded escrow company HOLD those funds and even make the monthly payments in regards to anyone who can put a lien and foreclose on the property. (Mortgages, HOAs, Taxes, Liens, Sewer, Garbage, etc etc etc)

Now if you still haven't read Jeff's posting, go read it now and I will wait. tap, tap, tap, tap.

You are back, great! I am simply amazed by how many people called replied with advice that this person needs a Realtor. You can do this type of transaction WITHOUT a Realtor, and rather easily if you understand and do your due diligence (either buyer or seller!) What you do need to do one of these transactions is AN ATTORNEY who SPECIALIZES in these types of transactions. There are scams on both sides, folks! When I do these types of transactions an attorney is a MUST once I procure the buyer for a seller or vice versa.

It is easy to procure a potential buyer for ANY of these types of financing. What isn't easy is qualifying and making sure they are doing it for the right reasons!

Posted Tuesday Apr 29
(04/29/08 01:23PM) — "The Lovely Wife"...Broker Bryant's Wife...

Renee...

You appear to be one of the few who actually 'got it' :)

I am amazed by some of what I read on that post.

Thanks for having a brain my friend :)

P.S. Notice how I didn't say anything? Wondering Why? Cuzz...I knew they wouldn't get it :) 

TLW...ROAR!

(04/29/08 02:50PM) — Phoenix Arizona Real Estate ~ Doreen McPherson

What TLW said.  :) 

I have done this before and it works, but you have to protect yourself.  I sold my house this way years ago, when interest rates were really high.  

(04/29/08 04:44PM) — Nashville real estate - Larry Brewer

Renee - Great response - I thought about it, then decided that I was too sick with a cold to waste my energy by responding to Jeff's post.

(04/29/08 06:07PM) — Alan Robinson

I agree that it works but it's not a process everyone is capable of handling. With the market being shaky it isn't necessarily the best move. 

(04/29/08 06:26PM) — Gary McNinch Renton WA Real Estate

Renee,

Thanks for the positives and negatives.  I've seen a couple times lately where agents haven't done their due diligence and left the client hanging out.  We have MLS form for both these types of transactions, but they are boilerplate and don't cover all the issues. Both homes are now listed and messed up.  

List and Sell (and use an attorney when it makes sense)  Gary @ RentonHomeFinder 

(04/29/08 06:49PM) — Boise Idaho Real Estate - George Tallabas

Very true Renee....I hope all is well in your neck of the woods.

(04/29/08 08:40PM) — Renee Burrows - Las Vegas NV Real Estate

TLW:  Sometimes I feel like parking, sometimes I feel like barking :wink:  Sometimes you gotta get to know your author and what he knows about "the juice" and giving handouts.  Little gifts of manna from heaven :)

Doreen:  It can be absolutely effective if you know what you are getting into!

Larry:  I hope you are feeling better soon!  Go get em tiger!

Alan:  It can be a great move, especially in a shaky market.  I hope I can encourage Doreen to write about her experience that she mentioned above!

Gary:  I have one lease option contingent and will probably close early.  :crossing fingers:  It was the right situation for all parties!

George:  Thanks for stopping by!  All is well as I hope it is with you too!

(04/29/08 08:41PM) — Ivan Tchakarov

Renee,

I would actually suggest that a lease purchase buyer needs a Realtor more than a traditional buyer. Over the past two years more than 5,000 tenant buyer applications have passed thru our company in Atlanta and I can safely state that  their real estate knowledge/experience level is rather low.

For sellers I would strongly advise against OWC - way too risky as foreclosures are a lot more messy and time consuming than evictions.

Great blog!

Ivan 

 

(04/29/08 10:07PM) — Rebecca Levinson-R.E. Blogger/Connect2Agent

Renee,

I missed Jeff's original post, but thanks for pointing me in that direction.  Lease options were more common when financing was in the double digits, and also just after the Great Depression.  That is actually how my grandparents purchased their first and only home (I know, what a rarity these days, imagine staying in the same house your whole lifetime).

Anyway, while the issue Jeff discussed was from a concern issued from a seller, and I certainly agree with your points above, a real estate buyer has to be careful as well.  Lease options can be a good way for a buyer to get into a house that doesn't meet credit guidelines where they are at today, but still has a good income and steady job history, but they can get screwed on the downpayments and interest if the contracts aren't written correctly.  That is why, as you have stated above, the two contracts, one for lease and one for purchase, are so important to a buyer as well.

The attorney part shouldn't be optional, it should be a must.  So necessary to the transaction, but we do live in the age of DIY.  How about some CYA? 

(04/29/08 10:52PM) — Menomonee Falls Real Estate - Matt Yogerst

We do numerous Lease Options in our office. It is just me and my broker/attorney. We mainly service investor clients, and a number of them are rehabbers. They have turned (quite successfully too) to doing a lease option on the backend to buyers. This allows them not only more flexibility with buyers, but also a higher sales price. It really can be a win/win, but for most homeowners it is more of a last resort if they can't sell conventionally. The investors don't mind since they collect the deposit, and if they do take the property back, they can just touch it up and resell it. Of course that is if the tenants didnt trash it! An agent isn't needed, but one should set up papers with an attorney for the first few transactions (for the investors).

(04/29/08 11:12PM) — Tigard Oregon Real Estate >> Wayne B. Pruner, GRI

This is a very good explanation of these more exotic forms of financing that appear in a down market. These can work if done properly.

(04/29/08 11:42PM) — Hope Goss

By hiring a Realtor, and marketing his home to the largest audience, he may not be considering seller financing!

(04/29/08 11:47PM) — Jeff Belonger -- The FHA Expert.com -- FHA Loans -- FHA mortgages -- Mortgages

Renee..... any buyer doing a OWC would have to have very, very poor credit. Gee, just with 10% down, lower rates, and with a credit score of 500 could be a FHA client. Now, the credit has to be decent, but define decent. Each client is different and case by case.  But I am closing on two different clients... one has a 504 score and the other has a 523 score. Just some food for thought. The reason why I am saying this is because people should be aware of this and not just assume, if they think their credit is that bad.

Overall, some good explanations in this post.

jeff belonger

(04/30/08 09:00AM) — Emily Lowe - Nashville, TN Realtor

I have a lady right now who wants to "try out" a neighborhood with a lease/purchase.  Not sure if I understand this mentality.  Scared of committing to a real house payment maybe?

(05/01/08 06:41AM) — Neal Bloom-Realtor ® Assoc.-CRS-Weston FL

Renee,

I don't see these types of programs in FL...seems as if they just want a straight deal with no bells and whistles....I guess they would rather not play banker.

(05/01/08 09:49PM) — Christy Powers - Pooler, Savannah Real Estate Agent

That's a great widget. It's hard to miss! I loved the post. It's definitely something available and a good option!

(07/31/08 09:13AM) — Diane Concialdi Home Staging Orange County California

I've seen, heard, found that Lease Options are getting pretty popular in CA.  Know a Realtor who only does lease options but requires a pretty big down payment. Great explanation, Renee!


Diane Concialdi

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