OT- "Lease to buy" new house while waiting on current house to sell, contract ?

[Milacron]

OT- "Lease to buy" new house while waiting on current house to sell, contract ?

Anyone here done this before ? Seller is receptive to the idea.. in other words, we would lease the new (literally new) house for monthly amount similar to what 30 year mortage payments would be (even though we wouldn't actually be needing a 30 year mortage after our house sold) for say 18 months max lease time, but agree to close on the new house within 60 days of selling current house. All lease payments would be applied toward the purchase price of the house. (surprising to me they would agree to that since it amounts to borrowed money on their part, which isn't free)

The biggest danger I see would be if even after 18 months, our house didn't sell and near end of our contract they had someone else in the wings making an offer we could be kicked out and would have been making all those lease payments for nothing* OTOH we could probably conjure up another mortage, but I despise going thru all that paperwork BS with banks.

Anyhoo, just wondered if there are any standard protocols with this sort of thing.... to help iron out the pesky details.

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*Not to mention having moved for nothing....although that part wouldn't be quite as bad as it might be since we would only move the bare minimum stuff and leave current house "staged" with furniture (and ten billion books, etc) and only move out everything when house actually sold.

 

[misterT]

The other maybe more expensive option that we took when we had our new house built is a bridge loan. Basically a second mortgage against the equity in your present house.

 

[surplusjohn]

I did something like this in 1980 when mortgages were all screwed up. Attorney figured it out, so it is doable, seller was motivated because the house would not of sold any time soon due to the economy then, I can't help with any details

 

[rivett608]

I think it would depend on the market where your old house is and what you "Have" to get out of it. In all but the worst market areas everything will sell at a price, around here we have had a few houses come on the market priced maybe 10% lower than what everyone thought the market should be.... both sold in a week or so. BTW there are very few houses for sale around here, maybe only 1 per block! All my visitors from around the country are shocked at how few signs there are in yards. That helps but there will always be some folks out there looking for a house at a good deal.

There are so many what "ifs'" now in big discussions like moving. What would happen if your house didn't sell if just moved back in? Is that an option?

 

[henrya]

snipped....... (surprising to me they would agree to that since it amounts to borrowed money on their part, which isn't free)

But its better for them to have someone paying something on the house as opposed to watching it sit empty while they make the payments. Or even if they own it free and clear its better to have cash flow than no flow.

You're gonna need a really good lawyer for this. If anything goes wrong on the seller's end, you will likely be in line for a whoopin' you won't soon forget. There's plenty of ways for this to go bad. Be careful.

 

[sa100]

The previous responders are spot-on when they advise caution - this is an extremely good deal, and you have to wonder why the seller is offering such favorable terms. He's losing a brand new house (no matter how well an occupant cares for the house, it's only ever new once, and used houses command a lower price), paying the taxes and insurance gratis (unless you are paying those in addition to the payment, which you did not say was the case) plus eating the finance cost.

Why would a seller do this? The quick guess is, he's in financial hurts and has to take what he can get. If he's got a loan and the lender forecloses, you will be out without a hope, unless you cut a deal and redeem the loan. Still, you would have lived in a low-rent home for that long so it's not a total loss.

But if this guy can't sell what I assume is a nice home in a desirable area for a fair price, what does that say for your chances to sell your home, unless you are willing to dump it at a knockdown price?

I don't know your motivations here, and I am not asking. But they are a key element in determining if this is a worthwhile proposition for you. If you think your current neighborhood will be going to hell and losing value, it would be a good idea to get out while the getting is good. If your wife hates the neighbors, moving may make sense. But, moving for the sake of moving, maybe not so much.

Whatever you do, heed the above advice from others and myself, and be extremely careful.

Steve

 

[Milacron]

The previous responders are spot-on when they advise caution - this is an extremely good deal, and you have to wonder why the seller is offering such favorable terms. He's losing a brand new house (no matter how well an occupant cares for the house, it's only ever new once, and used houses command a lower price), paying the taxes and insurance gratis (unless you are paying those in addition to the payment, which you did not say was the case) plus eating the finance cost.

Why would a seller do this? The quick guess is, he's in financial hurts and has to take what he can get.

FWIW, I said "house" just to keep things simple, but this is actually a waterfront/marina condo...but the best one in the whole development...the only one with unobstructed water views 270 degrees and the only one with direct access to the marina walkway right out the back door !

The first developer went bankrupt and the whole deal was recently taken over by a billionare (I sort of know him as I bought my warehouse building via his commercial real estate firm about 6 years ago). So, basically we are dealing with a well heeled commercial real estate and shopping center* broker/management company who just wants to get the ball rolling on this development.


Regardless, it is a cringer because we would basically be the first owners in the whole place and I've hear horror stories of folks in condos where nothing much sold, the developer checked out and the few there had to pay the water/sewer bill for the entire development just to have it in their little units ! In this case that sort of thing is highly unlikely...but still, I do need to do alot of due dilegence if this were to go forward I agree.

FWIW, part of their inspiration is that they would be the brokers for our house, which is in a highly desirable in town neighborhood, with deep water and dock (now you'll be curious why we might want to move in the first place, aren't you ? )

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*And yes I know commercial real estate and shopping centers are in the toilet but this guy has been so dominant in that industry for decades I can see him having so much money squirred away that it might not matter. Still, ya never know... need to check his current situation out somehow...

 

[Mark Leigh]

Everything your describing about being first in a unfinished development, leaning out and committing to another property without selling your existing home first, thinking that there will be an option at the end of 18 months ---

Sounds like a diaster waiting to happen, there are lots of remnants of this experiment out here in Calif as we speak.

It is a gamble at best, who knows how the market will look in 17 months, what if interest moves up a couple points ??

 

[Milacron]

Everything your describing about being first in a unfinished development, leaning out and committing to another property without selling your existing home first, thinking that there will be an option at the end of 18 months ---

Sounds like a diaster waiting to happen, there are lots of remnants of this experiment out here in Calif as we speak.

It is a gamble at best, who knows how the market will look in 17 months, what if interest moves up a couple points ??

FWIW, the main row of units that face the water are finished...the pool is finished...what is not finished (not even started for that matter) are the interior units.

Re interest rates going up later...yeah, I thought about that...maybe a provision to opt out of contract if rates go past X amount ?

 

[hawkfan9]

I did this 16 years ago, but the economy was in a much different state than present. Your biggest concern is two-fold.

1. Can you (or do you want to) close on the new home without having the existing home sold, if push comes to shove. And, will the mortgage company approve you for it with the higher debt ratio.

2. Are you prepared to walk away from the new home, and the monthly lease payment investment if things don't work out for you.

These are trying times in the USA, and market conditions are different all over the country. Where I live, things are much worse than other areas, and my area (midwest) has traditionally been a stronghold in property value and resale ability.

At present, there are 9 houses for sale on my street (about 2 miles long), and 7 are foreclosures. I tried to sell to downsize, and am finding it impossible, except to give it away to the vultures. I won't do that, as I've completely rebuilt the home myself.

If you're confident that your existing home is priced correctly for existing market conditions, and you're not at a price point that excludes 98% of the available buyers in your area, then go for it.

Jeff

 

[Fixee]

Don't want to rain on your parade.

Having said that, some of the big-boys on Wall St think average home prices will drop another 10-15% this year. The mood in DC is budget cutting, which leads to further price drops (good for those long in cash, poor for those long in homes).

Assuming that you home is already on the market, ask yourself the question: Why hasn't my home sold? If its been on the market more than 60 days, I'd suggest that its over-priced. You many not agree with the market, but she's a hard mistress. Make sure you're being very hard-nosed about the economics of this deal, particularly the value of your current home. I've watched very sharp businessmen get caught up in the emotions of what they think their home is worth, too many times. If you home isn't sold now, will it be in 18 months? In a market of falling home prices?

The deal is no-brainer for the seller. If the unit doesn't close, his carrying costs have been covered by your rent. If it closes, its just a delayed transfer of the asset from his books. Plus, you're helping him his project off the dime by having a Sold sign - which has a cash value that any good developer has pre-determined. In fact, you should not only get this lease-to-purchase deal as first in, you should be getting a significant discount off the asking price.

It's not a no-brainer for you.

There are considerable risks related to being the first into a condo project in bad economic times. For myself, even if I had cash (rather than a home to sell), I wouldn't be buying in on this project. Not because it isn't a great place, but because no-one knows if it will sell.

The current developer has probably protected himself from on-going maintenance costs (beyond a reasonable period for sales) via incorporation. But you don't have similar protection available. Once you're in, you're in.

The current developer has no-doubt bought in at a price that offsets his risk. But is he offering you a price that mitigates your risk?

BTW what is the actual condition of the property? When the last developer went bankrupt, what didn't get done, or wasn't done properly, regarding construction or maintenance? These situations never have a neat and tidy wrap-up. It's not like the government putting machine tools into long-term storage. How well do you know the situation? How well does the new developer know the situation? What has been done in terms of professional inspections? Even with inspections, there will be hidden gotchas.

Think of it this way, there are 4 likely outcomes:
1) You do nothing, hold on to your curent home until it sells, and then find the new home you want. Not bad, even if you don't end up with this condo in this development.
2) You do this deal, your home doesn't sell, and after making these payments for 18 months you move back into your home. Was it worth the expense and effort?
3) You do this deal, your home sells, you close on the condo, and the development goes belly-up - leaving you with expenses, no recourse, and essentially a lost investment.
4) You do this deal, sell your home, and the development manages to substantially sell-out over the course of several years. You live happily in your new home, smoking a cigar every evening on the veranda as you watch the sun set over the bay.

You have to do your own math regarding the likelihood of each of these scenarios. But ask the question: What is the market for these condos?

Without knowing your local market, I'd suggest that it falls into two categories: 1) Well-to-do employed folks looking for a second home; 2) Well-to-do retired folks looking to downsize.

The market of well-to-do folks in this country is shrinking.

Most people looking for a second home are considering the investment angle, and if their investment planners are projecting flat to falling prices, this isn't a strong selling point. When real estate tanks, the second home market gets hit first and hardest. This recession is no different from the rest, in this respect.

BTW, did you see the recent artical (NYT?) was about wealthy people cashing out their homes, and becoming renters, in anticipation of falling home values. I'm sure it overstates the case, but it does make an interesting point.

Most people down-sizing are having trouble selling their homes. All over the country, elderly communities are having trouble because the folks that want to buy in, can't sell out their existing homes.

So these two likely markets segments are having trouble buying right now. What's going to change that? As with the Great Depression, our Great Recession features a lot of common-sensical economic remedies, which will only enhance the bad. The right prescriptions are counter-intuitive, plus they threaten the rich and powerful. So.... it's not like you just have to wait a year or two and everything will start to get back on an even keel. It's not going to happen that way. Figure this advice, too, in your calculations of the likelihood of the 4 scenarios.

 

[Tony Quiring]

Seek dis-interested legal advise

Others have stated many warnings and observations, and I am no expert, but I have learned to best do homework as you are now.

I would seek out an expert legal advisor who specializes in this type of work.

But locate one distant from this market, someone who can look at all of the details and give clear advise and posibly see risks that would not show up to someone who may be "too close" to the deal.

Solid contracts should be in place.

It sounds real good on the surface, but one needs to know all of the details before deciding if it is "too good"

 

[SND]

Sounds like a fairly decent deal to me. It sounds like a property with decent future value, well located if there's a marina. Assuming its a good quality construction that won't fall into ruins in 10yrs(hard to find these days) then it can be a good investment. Sounds to me like the developer is giving you the good deal on applying the lease toward to purchase in order to make the first "sale" to put someone in there to make the whole project look more viable.


18months gives time to see some progress, and of course you need a clause that if there's no sign of the project moving forward to eventually be completed and ideally more units sold in that year and half as they finish them, that you can also opt out in case you did get stuck as the only one living in that whole area, which is highly unlikely like you said.

Also a clause regarding possible defects, that if in say 12months or whatever you decide you no long want to stay there for some reason, that you don't see it being worth the asking price if problems come out, you can still get out and let it be someone elses problem. Likely lose the rent $ but its small price to pay sometimes...

 

[cecilstrange]

There is a new risk and I wouldn't be buying East Coast waterfront property without trying to look into it. The insurance industry has fully accepted global warming theory and the anticipated consequences which include more frequent storms, more intense storms, and rising sea levels. All risk assessments are currently being revised and premiums are being adjusted upward to reflect new risk perceptions. Where state regulations prevent rapid premium rise, policies are becoming unavailable. This is a worldwide phenomena but the most notorious example is the state of Florida and industry watch organizations report that US East Coast waterfront property is quickly becoming the next victim.

I do not know about your property or your state insurance regulations or how you might obtain hard information. Nevertheless, if all perils and flood risks become uninsurable in your lifetime, mortgages will no longer be available, existing mortgages will become susceptible to call, value appreciation will plummet, and the pool of buyers will shrink dramatically.

 

[Milacron]

What's one of the first things to ask when looking at condos? Do the by-laws allow rental units. Apparently, they do in this case.

Another thing, why would the developer offer this deal if it's such prime property?

FWIW, the developer didn't exactly "offer this deal".... it was my idea, and they reluctantly "looked into it" and decided in my case they would be interested...supposedly due to my commerical property they could list plus the desirable home they could also list.

But that is a good point about the bylaws and renters...I'll check into that.

To whomever asked how long my house has been on the market, we have yet to list it for sale.

 

[PeteM]

Worst case scenario:

Sole occupant of 32-story Fort Myers condo wants out | news-press.com | The News-Press

NPR recently did a program on what went wrong for him -- maybe something to learn along the way?? Seems like this guy would have done better to get some of the promised amenities (garbage service, lights, front desk, security, pool, dock, restaurants, stores . . .) in writing as part of the contract.

 

[Sea Farmer]

I sit on the board of a local non-profit that just entered into a lease-with-option-to purchase. We looked at these extensively.

Typically, only a third to half of the rent is applied to the purchase price. The term is 12 months, not 18. And, the buyer/lessee agrees to make a substantial penalty payment to the seller if they do not go through with the purchase at the end of the term.

The purpose of both of these provisions is to compensate the seller for taking the property off the market during the term of the lease.

Your agreement is substantially more favorable to you, because of the other risks involved and discussed, condo development, etc. I don't think your deal can get much better.

The only risk I see that hasn't been discussed above is that the condos might start selling like hotcakes, and the seller, who is also acting as your RE agent, might not make best efforts to sell your properties, hoping to get out of the deal and sell the condo at a higher price than agreed upon with you. How likely is that? You know your local market better than anyone here. . . . .

 

[adh2000]

The only risk I see that hasn't been discussed above is that the condos might start selling like hotcakes, and the seller, who is also acting as your RE agent, might not make best efforts to sell your properties, hoping to get out of the deal and sell the condo at a higher price than agreed upon with you. How likely is that? You know your local market better than anyone here. . . . .

Yeah, or conjure up some other excuse to not follow through on the closing. That is a risk with rent with option to buy. Better to buy now and ask the seller to carry the note with a balloon payment in 18 months after your house sells. Worst case your house doesn't sell and in 18 months you have to negotiate a new note with the seller which usually isn't too bad because he sure won't want the unit back. If you are certain you want to buy then better to buy now.

Alan

 

[rimcanyon]

used houses command a lower price

Where is that true? Every new subdivision I know of, houses resell for more than the new houses. Unless the owner did something stupid that decreased the value. However, most owners add landscaping, custom features and upgrades.

 

[henrya]

snipped a bunch..................

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*And yes I know commercial real estate and shopping centers are in the toilet but this guy has been so dominant in that industry for decades I can see him having so much money squirred away that it might not matter. Still, ya never know... need to check his current situation out somehow...

So he's an expert and you're asking questions here to help you make a decision. Looks like bad odds from the get-go to me.

And the last thing I'd want is to have a circular deal - where he's selling your other place and you're buying his (sort of). Unless your lawyer can tie him up in knots - don't do this.