Tuesday, October 20, 2009
ALTERNATIVE FINANCING FOR A HOME

Today I  received two calls from two different individuals about alternative financing.  I am sure we will be bombarded with request from people who need to find a home, whose credit has suffered some type of casualty either from a short sale, foreclosure or results of unemployment.

I remember when I first got into real estate in the late 90's, I occasionally used alternative financing to help couples purchase homes.  There were Lease Option, Lease Purchase, or Seller Carry back terms such as  Agreement for Sale, Wraps, and of course there are always hard money loans.  Let's address a few of these:

• Lease Option- A Buyer (Renter)may pay an amount of money to have the first option to purchase a home from Seller at an agreed upon time.  The money to secure the option generally is not refundable. The Buyer (Renter)is not obligated to purchase at the end of the term, but it does insure that he will have the first right of purchase.  No other person can purchase the home during the option time and the Buyer (Renter) can sell his option to another party.  I have also seen where there is no money exchanged however if someone else wants to purchase the home during the Buyer/Renters term, the Seller must first give the existing Buyer (Renter)the first option to purchase.  However, the price of the home is not guaranteed to be the price that was initially agreed upon with the Buyer (Renter) entered the option.  Title stays with the Seller.
• Lease Purchase -  The Buyer (Renter), pays a substantial amount of money down to the Seller to purchase the property.  A portion of the lease amount goes towards the purchase of the home, and the other goes towards the rent.  An agreement is made between the Buyer (Renter), and the Seller as to how long the Seller will continue the Agreement before the Buyer (Renter) has to get conventional financing.  The Buyer (Renter) is obligated to follow through with the purchase and the Seller is obligated to follow through with the sale.  If the Buyer (Renter) defaults, the Seller can evict and keep the money the Buyer (Renter) has paid in.  
• Purchase Money Mortgage- works very similar to the Lease Purchase, but with a twist.  Purchase Money Mortgage generally makes up the difference between the purchase price of the home and the actual down payment.  It is secured by a Note or deed of trust given by a buyer, as borrower, to a seller, as lender, as part of the purchase price of the real estate.  The Seller can foreclose on the note if the Buyer defaults and recover the property. 

Both Buyer and Seller need to be aware of an Alienation Clause which is in most mortgage contracts.  A Bank or mortgage lender will have alienation clause declaring the loan balance due payable upon the sale of the property to any other party.  In other words the entire balance is due on sale.  Therefore if a Seller is selling the home to a Buyer, even though it is on a Lease Purchase, the Bank can call the balance due and payable whether the Buyer can pay the full balance or not.

In any case, if you find that your credit is not up to par, and you are looking to use alternative financing, keep in mind, there may be more pit falls than you may want to encounter.  Most property owners who are willing to consider Seller Carry back terms usually has a property that is hard to sell.  You may will end up paying a higher sales price as well as higher interest rates.  There is also a high risk of losing your money and the property. 

 For Sellers it is equally challenges when you sell your home through alternative terms, you may end up having to go through the expense and headache of evicting the Buyer(Renter), as well as repairing the property, as well as the negative consequences of having your mortgage company calling your note due and payable.

Alternative financing can work, and work well, however you would be wise to consult an Attorney to understand your legal rights, and always run these transactions through a third party servicing company who will collect and distribute monies to the appropriate entities thus keeping everyone up to date and on a even playing field.

Whenever purchasing real estate, always use a real estate professional who is familiar with the contracts and laws to best suit your needs.  For more information, call Cynthia at 602 697-4487.

Emage` Fine Properties, LLC

www.homes4saleaz.com