Housing: Time to Pull the Plug on Government Support

Bloomberg BusinessWeek columnist Chris Farrell tells why tax policies and mortgage relief that artificially prop up home values are forestalling a real recovery

Read the article -  http://www.businessweek.com/investor/content/feb2010/pi20100226_589467.htm

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Home ownership - a right or a privilege?

I think people should be taught about:

- How Credit Scores are built and what risks there are to harming them

- How to have a long term plan to be self-sufficient, whether it be budgeting for today or planning for the golden years (saving 20% of net).

FHA got into trouble with their 3% down, not enough skin in the game.  Government can never do a great job underwriting 10s of millions of mortgages.  And they are guaranteeing them against default?

MBA (Mortgage Bankers Association) is playing "duty of care professor" saying "Honor your Obligations! see http://www.nytimes.com/2010/01/10/magazine/10FOB-wwln-t.html

And TARP money is rescuing these same Mortgage Banks who wrote mortgages, made a profit, and sold the notes?

Compare this practice to Canada, whose banks manage and administer their own home loans, with no bail outs.  Their foreclosure rate is really low, probably due to prudent underwriting.  See http://www.businessweek.com/magazine/content/10_09/b4168072832439.htm

The Road to Hell is Paved with Good Intentions.  

The MBA allowed liar loans and other lovely tools during the boom (or Sen. Dodd (CT) and his boys did).

There is a Silent Tsunami of foreclosures coming in 2010 and 2011.  Especially with decrease of income and increasing of ARM payments due to resetting up 20% and more of current payment.

What do you think?  

I think we got a 3 - 5 year mess, and "propping up the real estate market" is just dumb.

Brian, REISkills 

Why I Like Lease Option Assignments Instead Of Sandwich Lease Options 

By: Brian Gibbons 
Submitted: 01:35AM on Wednesday 24 February 2010 | Edit

Many people have heard of Lease Options, but using them daily in your REIBusiness has risk and reward. 

Sandwich Lease Options are great tools, but there is risk when the Tenant Buyer does not pay you, the "sandwich" person and you are stuck paying the Lessor-Optionor. 

In a Sandwich Lease Option, you as the middle man (aka master leasee): 
- lease with an option as a principal, then 
- sub lease and sub option. 

You make cash profit on the difference of 
1) lease payments, 
2) option payments and 
3) back end exercise payments. 

The risk is to have the tenant buyer not pay you, so you are stuck with paying the seller - optionor/lessor. 

Many have used a Performance Lease Option, where it is agreed that the if the sub-lessee does not pay you (the master lessee), you do not have to pay the owner. I find that as a tough request to make of the seller - owner. 

What I do with lease options is Lease Option Assignments. 

I offer to Lease Option the property from the seller, and Assign the deal. 

Many sellers in this tough non-lending market just want a way to 
- get a reasonable sales price on their home 
- avoid a real estate Agent's 6% commission 
- net as close to their asking price as possible after costs 

The costs for a Seller to sell in this market: 
Say for a $150,000 house 
- 6% $9000 Agent 
- 2% $3000 Closing Costs 
- deductions of sales price 5% ($7,500) to 10% ($15,000) because of Buyer's Market 

So the costs to sell may be from $19,000 to $27,000. That does not net the seller close to $150,000. 

As far as buyers, people want a great well buildt house, safe neighborhood, great schools for their kids, and a well thought way to qualify for FHA Financing. 

FHA has created tougher qualifying for home loans, increasing down payments from 3.5% to 10% (for FICO Scores 580 and below). 

So what I do is use rent credits. 

Example) We charge regular market rent. 
If the Tenant pays on time, as an inducement, he - she receives a 50% rent credit, FOR THE 1st YEAR ONLY. 

So for $1000 monthly rent paid on time, tenant would receive $500. 
This is NOT CASH, only useful for when exercising the option. 
If the Option is not exercised, then the rent credit has no value. 

Say a house appraises for $150,000. And the seller allows rent credits to be used as a marketing tool to fill the house quickly with a qualified tenant buyer.

We offer the house at $155,000, with move in option payment of $5000. 
Monthly Rent is $1000 per month, and Annual Rent is $12,000. 
Maximum Rent Credits are 50% or $6000. This is a type of Seller Concession. 

So the numbers.... 

$155,000 strike price 
- $5000 option consideration at move in 
- $6000 rent credits 
--------------------------------------------- 
Seller nets $144,000 (if buyer pays closing costs). 

We assign our deal for to the Tenant Buyer for $5000. That is our fee. 

The Tenant Buyer gets: 
A lease for 36 months (12 months with 2 extensions of 12 months) 
$5000 option towards a down payment 
$6000 towards purchasing the house (toward the down payment or decreasing the purchase price) 

On a $150,000, a 10% down payment is $15,000. 

The Downpayment Shortfall is $15,000 less $5000 less $6000 = $4000. 
A budget is prepared to save the $4000 ASAP. $4000 divided by 36 months = $111.11 per month. 

This way to home ownership by using a lease option is helpful to the 
- home seller who wants to net a certain amount, and 
- a home buyer that needs time to qualify for a FHA mortgage. 

The real estate investor has little risk because he is out of the deal, unlike the sandwich where is at risk if the tenant buyer does not pay.