Lease purchase, seller financing, help?

Hope I am posting this in the right forum...
I am trying to purchase a home but am having issues getting approved for a loan due to debt ratios because I havent had a full year of rentals on another property yet. So the seller and I discussed a few options if I cant get a loan..
1) lease option - I 'rent' for 6 months or so, until taxes are done next year, and attempt to buy it again at that point assuming since my taxes are now done/documented I can get a loan
2) seller financing (this is what I would like the most advice on) - the seller does not own his house outright, he has a mortgage. He is willing to let me give him a down payment right now, and me pay him monthly what his mortgage payment is and he will transfer the title/deed to me. We will do some sort of time frame balloon clause, and in a set amount of time I will refi the house into my name. I know "due on sale" could be an issue, but as long as the payments are being sent on time monthly, the mortgage company is a large large company and I am sure has better things to do right now. My question is, does this plan sound good? Does it benefit him or me moreso? What are my risks involved?

Edited: 06/26/2010 at 05:59AM

Glen Andrews

Real Estate Coach · Oviedo, Florida

36 posts
29 Influence
1 Award

Icon_minipost Sep 23 '08, 08:56 PM

Hi Kim,
Let me give you my perspective on both, lease Option and Seller financing.

1. Lease Option: Will give you the sole right to purchase the property at a later date for whatever price you agreed on. The seller MUST sell but you as the Optionee (Buyer) do NOT have to buy if you decide not to. This gives you time to check out the home and neighborhood to see if it's a good fit.

You usually have a NON refundable deposit that you put down on the property as the Option consideration. If you go this route make sure you have the "Right to Extend' for up to 12 months just incase you're not able to get a loan in 6 months. Hope for the best, plan for the worst.

2. Seller Financing: It's OK that the seller doesn't own the home out right.
You would be buying the property on a "Land Contract" or an "Agreement for Deed" Your attorney or title company can tell you which is best for you. This doesn't have anything to do with the "Due on Sale clause". This benefits both of you. You don't have to get a loan just yet and the seller has sold the property he doesn't want any more. The only risk you have is NOT performing to the details of your agreement. The same as you would have if you went down to the bank to get a loan.
Just make sure you close this with an attorney or title company and make sure you check the Title for any liens.

I hope this helped!

Edited: 06/26/2010 at 05:59AM

Kim Rock

Residential Real Estate Agent · Yardley, Pennsylvania

72 posts
259 Influence
1 Award

Icon_minipost Sep 23 '08, 10:04 PM

Glen,
Have you done the seller financing process before? Can we talk offline maybe just so I can understand the process better, you seem to have a good grasp on it and it seems to be the route I want to take but have some more questions. (assuming I dont get a loan.. I will know next week)

Edited: 06/26/2010 at 05:59AM

Glen Andrews

Real Estate Coach · Oviedo, Florida

36 posts
29 Influence
1 Award

Icon_minipost Sep 24 '08, 12:57 AM

Kim, you can call me at my phone # I have on profile or e-mail me directly

Edited: 06/26/2010 at 05:59AM by Administrator : REMOVED EMAIL ADDRESS

VAL AUSTIN

Homeowner · San Diego, California

13 posts
20 Influence

Icon_minipost Oct 05 '08, 07:24 PM

I'm new to forum and would like to piggy back this question as it is what I'm now in process of doing. I am the seller in this case. I've gathered all the info by contacting the title company. I have a property valued at 245K and I owe 175K.

I've lived in property over 2 yrs and my original goal was to sell and pay no taxes. I understand I have 3 years from the time I leave the property to still do this. However, I will be leaving the state and prefer not to turn into a rental. I'm planning to do a REC with $20K down and 2.5 yrs for buyers to get loan. I thought this would still put me in a "no tax" group since I would have all my money out in less than 3 yrs. But I called IRS and it appears I would have an installment sale. Can someone give me info on this? Seems unfair that I can pay no tax on an outright sale...and that goes out the window even if you still sell it in under the 3 years.

Edited: 06/26/2010 at 06:04AM

VAL AUSTIN

Homeowner · San Diego, California

13 posts
20 Influence

Icon_minipost Oct 05 '08, 07:34 PM

Additional info to my above post that I forgot to add.

I'm planning to allow the buyers to claim the tax deductions for the payments they make, taxes, insurance--this will be written up by the attorney....my understanding from title co we present them with our purchase agreement and they send to the atty for the prep of the REC then the final pkg is held by an escrow that collects the payments until the "buy out" of the contract occurs in 2.5 years.

Is there a better way to structure this and or what should I be aware of tax wise on this?

What happens if 2.5 years arrives and the buyers are unable to get a loan? Do they lose the property? What kind of clause should I put in to compensate me in case they don't perform? For example, can I state that the price will be $5,000 more or what?

I'm looking for any thoughts or suggestions from those of you who have "been there---wished they hadn't done that"!!

Edited: 06/26/2010 at 06:04AM