Friday, October 22, 2004

Lease To Own One of Several Bad Credit Options

For many buyers without cash or with credit problems, the solution to homeownership in the past has been a lease-to-own contract. The traditional wisdom behind this arrangement has been that the buyer is able to rent the property from an owner for a designated time period, usually paying a rent higher than market rate. The extra cash is then applied to an agreed upon down payment amount. In the end, once the down payment is acquired (and hopefully a better credit rating for the buyer with time), the transaction is consummated with a settlement and the property exchanges hands.

I’ve received numerous letters from readers asking how this arrangement works. It depends on the wants and needs of both the buyer and the seller.

If a buyer needs cash for the down payment, then the lease to own is a possibility. Here’s how it works. To build up a 5 percent down payment for a $200,000 purchase, the lease agreement would include rent, plus an additional premium on the rent that will be used to build up the down payment. The amount of the premium depends on how much the buyer/renter wants to save and how much s/he can afford to set aside. To attain $10,000 would require an additional $833 per month for a year; $555 per month for 18 months; or $416 per month for 24 months.

Thus if the going rent for this house is $1,200, the premium would be tacked on to the rent and set aside for the down payment so that with the one-year plan above, the monthly payment would be $2,033.

What this does for the buyer is to guarantee a purchase of a house for the buyer at today’s prices – assuming you want today’s prices. In a market that is dropping in value, a lease to own could set you up to buy a house at today’s prices only to find that when you finally settle on the property it’s actually worth less than it was on the day you agreed to buy it. The seller, on the other hand, may be cutting off future gain if a property is moving upwards.

In a dropping value scenario, the buyer may have a difficult time getting the desired financing in the future if the price of the house drops too rapidly – thus giving you a home not worth the amount you agreed to in the past. You could still buy it, but you may have to come up with even more cash to satisfy the eventual lender’s loan-to-value limits.

For instance, if you agree to $200,000 and in a year it drops 3 percent in value, the house would then be worth only $194,000. The eventual lender may require a 5 percent down payment -- from this new level of value – meaning the maximum loan amount is $184,300.

But since you’ve agreed to buy the house for $200,000, and was planning on a mortgage of $190,000, you’re now short $5,700 ($190,000 - $184,300 = $5,700). This is the difference between what you were planning on borrowing versus what the lender will now let you borrow. Since you’ve already agreed to pay $200,000 you must come up with the $5,700 or be in breech of contract.

The opposite is also true – and is a risk the seller takes in this scenario. What if the house increases in value the same amount – 3 percent? That means that in a year, the house would be worth $206,000 instead of the agreed upon sales price of $200,000. On this side of the transaction, it’s a much easier scenario -- the seller just lost six grand. He doesn’t actually have to write a check, it’s lost mainly on paper. Because of the contract, he can’t demand the extra money.

If the seller wants to take a gamble on increasing values, he could write up a lease with a purchase option agreement instead of the lease to purchase agreement. This means the house does not have to settle – it just gives the renter the option of buying the house at either the fair market value at the end of the lease or an agreed upon sales price higher than today’s going rate.

As far as the paperwork goes, a contract is written up with the agreed upon sales price, but the settlement date is set for a year later – with the contingency that the buyer will rent the property for that amount of time. Simultaneously, the renter/buyer and landlord/seller sign a lease contract establishing the monthly rent, due date, and what the two parties will be responsible for over the rental period. At the end of the lease, the house goes to settlement and the renters become the new owners of the property.

One final word of caution: don’t try this on your own. A lease-to-own arrangement can get a lot sticker than a traditional transaction because there’s now a legal arrangement for a prolonged period of time between the buyer and seller instead of the usual shorter-term. Plus, the seller is now agreeing to be a landlord, which comes with its own set of rules and regulations. Time breeds discontent, especially if the price starts to fluctuate. Seek out professional help to make sure everything is on the up and up.

Friday, October 15, 2004

Outer Space Land Not So Far Out

Homo Sapiens will buy anything. A few questionable products I can think about include the Chia pet, pet rocks and lunar plots of land. Of course, I had never heard about the lunar plots until a few days ago, when I came across an article from Agence France-Presse, republished on a web site called

It seems that an American entrepreneur has hit pay dirt with a scheme to sell lunar plots to Earthlings for about $25 a pop – and these aren’t cookie cutter pieces of property, either, measuring out to around 700,000 square metres each (150-plus acres). While, the sale is actually old news, Dennis Hope, the American who came up with the idea, claims he’s found a loophole in the United Nations Outer Space Treaty of 1967, which makes his parcels legitimate.

Purchasers of the plots (including about 1,200 lunar land owners in Germany) became concerned about their claims when President George Bush began talking about returning to the moon, building a space station and launching missions to Mars from the Moon. They’ve begun a letter-writing campaign to the White House, requesting that the U.S. respect their “land rights” and to at least not leave rusting space junk on their property.

Further research reveals that the quest for owning space bodies is beginning to heat up in the 21st Century. In fact, in 1993 three Yemeni brothers sued the United States government for trespassing against their property - Mars. They claimed to be the owners since they had inherited the Red planet 3,000 years ago from their ancestors. Did our government take it seriously? Well, we sent lawyers to Yemeni to deal with the issue.

It seems laughable, but where there’s potential development, of course, lawyers are soon to follow, which brought me to another piece in the Christian Science Monitor about outer space law makers. Now, these guys are serious – so serious that students can major in accredited studies in college – the University of Mississippi being one of the institutes of higher learning that offers a degree in space law.

It appears the lunar landowners could have saved their money if they had looked up the Outer Space Treaty and found out that it “provides the basis of all space law with its clear decree that no nation can claim ownership to any part of it, and all nations must agree to its peaceful use. The treaty was signed by all major space powers and remains the guiding light of space initiatives,” according to the Monitor.

The idea of space law is to prevent the free-for-all type colonization of heavenly bodies the way our Earthly history has been marked over the last several hundred years. At this point, the nations that could actually develop any type of intergalactic property have signed on to the treaty. But that was nearly 40 years ago when no one had even been to the moon yet.

The treaty is about to truly be tested as the International Space Station becomes operational and the idea of building improvements on the lunar rock near reality.

Think about it – who really owns the Moon and who can tell anyone else what to do if they decide to start development? Enter the laser-toting, brief-packed space attorney. When you consider that it’s going to take billions of dollars to traverse and develop a building lot more than 13 million miles away – I say to the victor go the spoils. Whoever can get there first and build something, go for it.

Realistically, though, while it all may seem like sci-fi today, if the Outer Space Treaty prevails, it means we all will own a piece of the rock and that’s probably how it should be.

Sunday, October 10, 2004

Will Moving Early Cause Capital Gains Taxes?

Q: I am a homeowner of 18 months getting ready to move from Portsmouth, VA to Pensacola, FL with no plans to return to this erea. I don't know whether to rent my place out or sell. I am an active duty navy doc, planning to be a flight surgeon. I bought my condo for 165K, my real estate agent thinks we can sell it easily for 200K. The value is expected to continue to increase. I am not sure if it is worth it to rent, I am very confused about capital gains and the rules as they apply to my situation.

Lt. McNiff

A: You should review, first, your lifestyle choices. Do you HAVE to sell? Can you hang on to it for a while? Can you buy another home without the funds from the sale of your VA home? Will rent cover your monthly expenses? If you put the money in another fund, will you have as much return?

Your biggest challenge is the fact that you haven’t been in the house for more than 2 years. You will be able to reduce your capital gains tax because you are moving for your job. There’s more information at regarding that. Where are you moving? What are the appreciation rates like there? You need to sit with an informed mortgage professional who can run through the numbers. In addition, you may want to call your tax professional to get a read on what your tax liability would be on the gains.

Visit to see some FAQs regarding Capital Gains and the sale of a home.

Friday, October 08, 2004

Feds Offer Housing Assistance to Renters

For those who find themselves using HUD Section 8 housing choice vouchers, homeownership is not as far away as you may think. The Homeownership Voucher Program enables first-time homebuyers in low income brackets to purchase a house using HUD Section 8 funding to help with the payment and some housing expenses.

The federal program is administered through local Public Housing Authorities (a list of which can be found at this link: Meanwhile, not all PHAs participate in the program, however, thousands of new homeowners across the country enjoy the benefits of homeownership because of this program.

Housing vouchers can only be obtained by current holders of HUD rental vouchers. So if you want to take advantage of this program, then you have to apply via HUD for rental voucher assistance first before then following the process of using that voucher to buy a home. The voucher can be used to subsidize the monthly payment and housing expenses – the amount it will subsidize is up to 70% of such payment, according to the HUD web site,

The tenant-buyer must find the house, which must undergo an initial housing quality standards inspection conducted by the PHA, as well as a home inspection. The good news for families that live in expensive areas, unlike the rental voucher, you don’t have to buy a house in the jurisdiction of the PHA.

Here are some other requirements of the program:

First-time homeowner or cooperative member.
No family member has owned or had ownership interest in their residence for at least three years.
Except for cooperative members, no member of the family has any ownership interest in any residential property.
There is an minimum income requirement calculated by the current minimum wage times 2000 hours – that’s currently $10,300 annually. For disabled families, the qualified annual income of the adult family members who will own the home must not be less than the monthly Federal Supplemental Security Income (SSI) benefit for an individual living alone multiplied by 12 (currently $6,768). These are general guidelines, the PHA may establish a higher minimum income requirement. Except in the case of an elderly or disabled family, welfare assistance is not counted in determining whether the family meets the minimum income requirement.
Employment requirement. Except in the case of elderly and disabled families, one or more adults in the family who will own the home has been and is currently employed on a full-time basis for at least one year before.
The PHA may have its own requirements as well that must be followed.
The family must attend and satisfactorily complete the PHA's pre-assistance homeownership and housing counseling program.

The homeownership voucher can also be used to help cover monthly homeownership expenses, which include the following:
1. Mortgage principal and interest, 2. Mortgage insurance premium, 3. Real estate taxes and homeowner insurance, 4. Part of the utilities,5. Some routine maintenance costs, 6. Allowable major repairs and replacements, 7. Principal and interest on debt to finance major repairs and replacements for the home, and8. Principal and interest on debt to finance costs to make the home accessible for a family member with disabilities if the PHA determines it is needed as a reasonable accommodation.

Like all good things, this won’t last forever. While the voucher program has no time limit for an elderly household or a disabled family, all other families, can only receive assistance for 15 years if the initial mortgage is 20 years or longer. For all other mortgages, the assistance runs up to 10 years. This limit is very generous when you consider most homeowners stay in a property an average of five to seven years.