What are the alternatives to doing a short sale? What if a homeowner does not want to take the hit to their credit rating that comes with doing a short sale?
One option is to keep paying the mortgage on a house that is worth less than what is owed on the mortgage.
Another option is simply to walk away, and let the bank foreclose.
A third option may be to rent the property out. But what if the market rent is less than the current mortgage payments, taxes and insurance?
I actually buy houses from homeowners who are underwater on their mortgages. The way I do that is by doing a long-term lease purchase, which allows the market value of the house to catch up over time to the balance owed on the mortgage.
A “lease purchase” means that I will rent the house from the homeowner for several years, before purchasing it. In a situation where the homeowner owes more than the house is worth, I may want a very long-term lease, perhaps a minimum of ten years. Or a yearly lease, with the option to renew at the same terms on an annual basis.
The rent that I will pay is equal to the monthly mortgage payment including taxes and insurance – and I make all day-to-day repairs during the term of the lease. This rent is typically higher than market rent, but it covers the homeowner’s out-of-pocket costs, and eliminates the hassle of dealing with tenant repair requests.
The homeowner makes no profit on this arrangement, but they take no hit to their credit, pay no out-of-pocket costs for real estate commissions or transaction costs, and can apply the lease income towards qualifying for a new mortgage to buy another house they can afford. It allows an underwater homeowner to move on with their life, with no damage to their credit.
Because the house is leased, not sold, it does not trigger the lender’s “due-on-sale” clause nor require immediate payment of state excise tax.
The house is purchased for the mortgage principal balance at the time of cash out. This allows the market to catch up to the loan value, and allows the tenant buyer to benefit from mortgage pay-down.
Typically, I will prescreen prospective tenant-buyers to place in the house; these tenants must also be approved by the homeowner. I am screening the tenant buyers for criminal background and credit worthiness, available cash to put down towards the purchase of the house, and income verification.
Why would a tenant-buyer be willing to pay more than market rent for a house that is underwater? Because this arrangement allows them to purchase without having to qualify for a bank loan immediately. This gives them time to qualify while living in a house that they have realistic prospects to own.
If you are facing a short sale, and would prefer another alternative, this option may be right for you.
If you have some credit challenges, but would like to own a house, this option may be right for you.
For more information, please contact me at HomeLandInvestment@gmail.com or call 425-270-7292.