short sale v rent-to-own

Asked by Rebecca, 01775 Fri Jul 9, 2010

I currently own a home in Abq that has been on the market since Oct. No offers and are priced 20K lower than the other lofts on our block. Moved to Boston in Dec and home has been vacant since (perfect condition and checked in on by friends). Now at the point of considering a short sale. Bank has been unwilling to negotiate and I've lost my job. We've been able to scrape by all these months and it seems for naught. My credit score is near perfect and fortunately the house is only in my name and not my spouse's. We have recently received an offer to rent-to-own for $400 less than our monthly payment, with almost 4% down. Another caveat is that the potential buyer wants 3 years until purchase. This sounds like a headache as we are just starting our family and I'm finally seeing that my credit could've been well on its way to recovery by now. Finally, bank will not even talk to us until we're 60 days late - says that is an FHA rule. The idea of being late kils me. Suggestions?

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8
Don Tepper, Agent, Burke, VA
Fri Jul 9, 2010
The advise below covers much of what you've asked.

I understand your reluctance to default, damage your credit score, etc.

Rent-to-own may not be a bad solution at all. (I'm a big advocate of lease-options in the right situation.)

The first question, though, is: Is the monthly lease amount equal to or greater than what you could receive just by renting? Someone purchasing on a lease-option should pay at least the going rate, and ideally somewhat more.

If the offer is below the going rental rate, you'd be better off with a straight rental.

However, let's assume the lease amount is equal to or above the fair market rent. The next question is: Can you live with a $400 a month negative cash flow? If yes, keep reading. If not, then the offer won't work for you. You'd need to make sure that you can handle whatever negative cash flow you'd encounter.

OK. So let's assume you can (with some pain) handle a $400 a month negative cash flow. And check with your accountant, but you should be able to deduct your rental losses on your income tax, thus reducing somewhat the after-tax consequences of the loss.

The 4% down is nice. That's a good, solid amount for a lease-option. You can try asking for more, but 4% isn't bad. And your lease-option should be structured so that the 4% is non-refundable. And again, check with your accountant, but that 4% isn't taxable until either the option expires or is exercised.

The 3-year period is OK. In fact, it probably suggests that the tenant-buyer is serious about buying. I don't like short (6 month or 1 year) lease-options. In those cases, the tenant-buyer might as well buy. And it's a lot of hassle for the seller, especially if the tenant-buyer doesn't exercise the option.

Next consideration: Can you narrow that $400 negative cash flow? (Assuming the lease amount offered is fair, to begin with.) Here's one strategy: Do a land trust with the property. You'd become the settlor, and your tenant-buyer (under the lease-option scenario) would become the resident beneficiary. There's a big advantage for the resident beneficiary: Beneficiaries of a land trust can deduct taxes and interest from their income taxes. Check with an accountant who understands land trusts. But now you could increase the monthly payment by the resident-beneficiary, but that increase would be more than offset by the tax benefits. For more information, see http://www.landtrust.net

That's the first thing I'd look at to narrow the negative cash flow. But if you decide, for whatever reason, to continue with a lease-option rather than a land trust, you may be able to bump the rent up in return for a higher rent credit. For example (just making these numbers up), let's say your home would rent for $1,000. But with a lease option you'd be charging $1,200, with $300 credited toward the purchase price. Instead, charge $1,300 a month rent with $400 credited toward the purchase price. That becomes even more attractive for the tenant-buyer.

Finally, I congratulate you for looking for alternatives to a short sale.

Hope that helps.
1 vote
Mona Romero, , Albuquerque, NM
Thu Jul 15, 2010
As a Short Sale Specialist I can tell you that consumers are often frustrated in dealing with their mortgage companies and do not necessarily know all of their options and possible scenarios. There are so many government programs available to distressed homeowners yet this information is not reaching consumers who desperately need it. The initial contact a consumer makes with their mortgage company is with a customer service representative who is not the person they need to speak with who can make decisions regarding their account. The documentation and paperwork that is required of the homeowner can also be overwhelming....you definitely need to utilize the expertise of a knowledgeable expert in short sales.
0 votes
Rebecca, Home Owner, 01775
Tue Jul 13, 2010
David, to answer your question, the loft/townhome is downtown (87102) and the lender is Bank of Albuquerque.
0 votes
David Staffo…, Agent, Albuquerque, NM
Fri Jul 9, 2010
I guess I would also caution you about short sales. Going down that road could lead to foreclosure, so again, possible hard work and delay of inevitable. Some banks will not end up approving your short sale at a reasonable price, and will eventually foreclose. Where is the unit and who is the lender?
0 votes
Rebecca, Home Owner, 01775
Fri Jul 9, 2010
Thank you for the helpful advice so far. Everyone I've spoken with has a different opinion and it helps to see my options written out. The house was purchased in 08 for 165K and that is what we owe today. We got it at a steal considering the identical unit next door paid 220K only months before. Monthly payment is about 1350 plus 110 in HOA costs. Our prospective buyer (rent-to-own) can only do 1K/month. This is after much bargaining since he started with an offer of 800. Other units have rented for 1200/mo. We also have our broker looking for renters. Since it's a 3-story 1bed, it has to appeal to the right working professional.

I do have apprehensions about renting from 2200 miles away - we have been talking with a property manager who we'll use if we go this route. Finally, $400 neg cash flow a month sounds like a breeze at this point but I do believe the market is going to get worse and that the potential buyer won't be able to get financing for the mere 160K he's offering (and if things really do get worse, I might just be prolonging the inevitable short sale). It really is a losing game either way. You spend all your ilfe climbing the ladder to perfect credit, buy your first house without any help, and then BAM. Thanks for your insight, professionals. I will research real estate attorneys out there on how to proceed.
0 votes
Aaron Sandov…, Agent, Albuquerque, NM
Fri Jul 9, 2010
Nellie,
I am seeing the same scenerio over and over again - due to unforeseen occurances - divorce, job loss, job change - homeowners who have invested in a property that they are now needing to sell. The homeowners have kept current on their payments and have sacrificed to do so. When these properties do not sell homeowners are being faced with very tough decisions; should they rent or lease, lease options, short sale, deed in lieu or foreclosure. Any one of these decisions could possibly trigger tax implications along with a possible long term effect on your future real estate purchasing options. As stated - the initial step is to speak with a real estate attorney who is licensed in New Mexico - very importantly a local tax advisor who can help you make an informed decision on how to proceed to try to lessen or control any tax implications from your decision. Best of luck to you and please keep me updated on how you are progressing with your difficult decision.
0 votes
David Staffo…, Agent, Albuquerque, NM
Fri Jul 9, 2010
If selling with option, do they want a credit each month? If so, you need to get a higher than mkt rent and you can keep that, and an option fee, if they do not execute purchase option. You also need to consider how you determine purchase price, set it now, or agree on method for determining it. I would set it now, but that is only because I do not expect prices to be any better 3 yrs from now. You need to consider that you could lose $400/mo and still have to sell for what you owe (so lose another $15k). Deciding to default is risky too. I can not give legal advice and would recommend talking with an attorney before you decide to do so, whether for short sale or for foreclosure. You might also discuss deed in lieu of foreclosure with lender, since it sounds like it is worth about what you owe. My general thoughts would be that it is worth trying to hang on if you think the market will come back and start appreciating, but maybe not if you don't. I happen to think values are going to drop further. I deal with short sales and foreclosures extensively (just google "albuquerque short sales" and you will see one of my videos near the top), so email, text, or call me any time with further questions or more detail. Best of luck to you Nellie!
0 votes
Spirit Messi…, Agent, Tucson, AZ
Fri Jul 9, 2010
I know it seems like a catch -22, you are trying to communicate with the bank about your situation however until you stop making payments they will not consider a short sale. No offense, but why would they when they are making payments. Honestly, this is YOUR level of comfort we are talking about here, renting, leasing out your property and even then, the renters will have the first right of refusal, so IF the market continues to slide you may not be any better off than you are now. Plus, talk to some people who have done property management, it can be hit or miss but it can be a pain and a lot of work, compounded if you are living in another town. Still, this is something you need to decide, keep it or rent it out. Before you consider the short sale route, talk with an (bankruptcy) lawyer about any consequences and then talk to a local Realtor. See what the comps are at and what would it take for it to sell, now. It sounds like the bank has spelled out what you need to do in order to go the short sale route, there should be a short sale specialist local Realtor there as well who can help you navigate those waters.

Good luck.
0 votes
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