Lease to Own ?
Step 1 Find out what you can afford to pay
Lease or rent to own a house is a topic that seems to be very hush hush and it is.
In a true lease to own there are really two people involved the first is a property owner and the other is a person who has the desire to own a property.
To start let’s give each of them a title. First “The Property Owner”.
The property owner we can call an investor. The investor has more money than they need at this time and are looking for a return on their investment. Their return on investment will have to be considered and that is simply a percent. That percent could be anywhere from 0% or a negative return on investment all the way up to 20%, 30%, 40% or more. This will depend on the economy, the location, and what percent return on investment the investor is willing to accept. More on that later.
The other person. Let’s call the other person “The Buyer”
The Buyer is the person who is no longer wanting to be a renter but wants the chance to eventually own a home of their own. The buyer usually has been a renter thus far and has not been able to raise a down payment of some huge amount of money to secure a traditional mortgage. This is not a bad thing, it’s more just a fact of life.
So in trying to keep this as simple as possible will just talk about “The Buyer” and “The Investor”
To the buyer, here is my first bit of advice for you. Your mindset will have to change from being that of a renter to that of being an owner. A renter will always have a landlord that they can call upon to fix a broken faucet, unclog clogged pipes, fix a leaking roof, have the building insured against flooding. A renter is not responsible for the upkeep or expenses related to owning a house. Also property tax, can’t forget that. Rent for the most part covers everything as on fixed monthly price. Depending on where you live the government can also restrict how much the rent can be increased on a year over year basis. So if you are thinking of becoming an owner instead of a renter the first thing you will need to do is realize how much you are paying out for rent on a monthly basis.
So here is a simple mortgage calculator that you can use to sort of figure out what price range of home you might be able to afford. http://istockhomes.com/Mortgage_Calculator.php
To use the calculator is fairly simple just fill in the three lines. First find out what the five year fixed mortgage rate is in your area just by looking at your bank rates. Enter that number in the annual interest rate field. Then for a down payment just enter “0” for a start, after that enter in the price of the house you want to be able to afford. Make sure the “explain calculations is on” then press calculate.
If you have been honest with yourself and entered in reasonable numbers hopefully the monthly payment amount come up as less than your current rent.
So far lease to own and rent cost about the same amount. So time for our next calculator, we call it a do it yourself home inspection report.
If you are anything like me this will bore you to tears. So skip right to the bottom of the report and enter in the price of the home you are wanting to invest into. Along with your currency then press the “process” button. You can come back to this form later when you are actually going through houses to land the house of your dreams.
Now another page should appear. Please feel free to print it out. This page will detail out some of the possible expenses related to owning a home of your own. As a homeowner these additional expenses will be yours to cover. For instance a roof needs to be replaced every 25-40 years depending on the quality of the roof. As a decent rule of thumb I would be trying to pay 20% less on a mortgage than I pay on rent because I’ll have to cover all of the additional expenses.
As a note many people who approve for a mortgage have to return to the bank within a few years to apply for a second or third mortgage just to cover the additional expenses.
The 20% less that we are wanting to pay on the monthly fees are to be saved to cover the additional expenses of the home ownership.
To summarize this first section. Take your monthly rent of say $1200/month and multiply it by .8.
Using a calculator would be 1200 x .8 = $960.00/month. Now go back to the mortgage calculator and enter in the “Annual Interest Rate:” the amortization period or how long you want to take to pay off the mortgage.
You should now have a total price that you can afford to float. Is it a $100,000.00 dollar mortgage or is it $1,000,000.00 or is it more or less.
With this amount figured out and knowing that you will have the additional expenses of ownership you now have a number to work with and we are on to step 2.
Lease to own.
Step 2 How to find the Investor that you are looking for.
In step 1 hopefully you have taken a look inward, taken a seriously look at your financial situation and come up with a price that you can afford to pay for home ownership.
Now, you need to find an investor. The investor is someone who is willing to invest in you. Yes, you heard me right, your investor will be investing in you. When you go through a bank the banker will be looking at you as a number or set of numbers to do a risk assessment. Then they will be asking for a deposit. The deposit is usually a large amount of money that protects the bank from you walking away from your mortgage when you find out that you owe more on your house then it is currently worth.
The investor that you are looking for is probably closer to you than you know. I’m going to give you a few hints and ideas on how to find your investor and how you can get them to help you purchase the home of your dreams and how the partnership can be good for both of you.
Here goes. For a start the relationship between yourself and the investor is in a way going to be a relationship, a business relationship. They will be the ones floating a huge debt for a large number of years and you will be in a legally binding contract. If it sounds serious that is because it is. A bank does not give out it’s own hard earned money, it gives out money belonging to it’s customers.
In order for you the buyer to persuade an individual investor to invest in a home for yourself they will need to believe in you. They will need to know that you will continue to pay even when, especially when times get tough.
Remembering that this is going to be a business relationship you are going to have to be persuasive enough to make your investor sign a contractual agreement allowing you to purchase a house off of them. On top of that you will probably want to be doing it with no money down. Now, that is going to be a challenge.
If your mindset is people helping people you are on the right track. What you are wanting is to finally purchase a house and become a proud land owner but what are you offering in return?
In return you are offering your investor a fair return on their investment. It’s even a guaranteed percentage return. In the final contract you will be paying a guaranteed amount. You will also have a payment schedule in place showing exactly how much is owing each month and how much interest they will be receiving. On top of all that, if for some unforeseen reason you are not able to continue to pay the payment the contract can be closed and the house can be returned to the original investor and the original investor can receive all of the additional value that the house has now accumulated. Not a bad deal for them.
In short you get a house with almost no money down and the investor gets an almost guaranteed return on their investment.
Notably the investor should keep up insurance on the structure until such time as the loan/mortgage is paid off.
Step 3 Who is this Investor
This investor more than likely is not yet aware that they are going to be your investor. Remember this is going to be based on a relationship.
So, as one person such as yourself is looking to get into the housing market another person is looking to get out of the housing market or at least downsize because they no longer need a big house. Their children have already grown up and they might even be wanting to enter into an old folks home.
This is where I’d recommend you looking, look for someone downsizing and let them know how much you could help each other. It’s also a whole lot safer than investing in the stock market.
What If you don’t know of an Investor that you can work with?
If you don’t know of an investor that you can work with we have a form at Istockhomes that you can fill out and we will share it with people that we know and maybe just maybe we can help get you in that home that you’ve always dreamed of. http://istockhomes.com/node/add/find-my-dream
Step 4 Make it legal
Follow this link: http://istockhomes.com/istockhomes-marketing-ltd-terms-contract-rent-own-and-sale-real-estate then fill out the form and print it up. And take it into a lawyer to legalize it.
The title will be transferred once the loan is completely paid off unless some agreement is in place right from the start.
Rent to own is not easy but I do recommend it over using a bank for in a working business relationship there is usually some understanding and at least a little bit of leeway.
Hope this helps Brad
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