- Lawn service, home security systems, etc. are all monthly and yearly maintenance fees and dues associated with the home. Other examples of these are pool service, lawn sprinkler maintenance and even country club fees. Many homes won’t have these or at least not all of them. Assigning responsibility for payment of these fees should be part of the negotiations.
Example: Let’s take a look at a sample transaction to help you understand the process.
John and Joan Homebuyers were told by their loan officer that they couldn’t qualify for a mortgage. “You must improve your credit score first.” They live in a “down” real estate market and know that now is a good time to buy. They have always dreamed of home ownership and want a home NOW. They enlist the help of Sally Agent, a local Realtor®, who understands how to do rent-to-own home transactions.
From talking with their loan officer, John and Joan have determined that once they qualify for a mortgage, they can afford the payments on a $220,000 home. So they begin to look in that price range. Alan and Ashley Homeseller live in the same market. A few months ago, Alan received a promotion at work that requires them to relocate to another city. Alan and Ashley know the real estate market is down, but they have no choice but to sell their home now. They have it listed with Realtor® Thomas Broker (and yes, I do go to great lengths to come up with these names).
Alan and Ashley have had their home listed for 4 months at $225,000 without any offers. The need to get their home sold is getting urgent. Their agent, Thomas, recommends Alan and Ashley reduce the asking price to $215,000. After Thomas explains to them how it works, Alan and Ashley agree to add the rent-to-own to their listing.
Soon, Sally Agent shows the house to John and Joan, who decide to make an offer on it. Their initial offer is $205,000 for the purchase price. They agree to the asking rent amount of $1,400 per month and ask for a $500 per month option credit. For their option fee, John and Joan offer 1%, or $2,050, and a $250 security deposit. They also ask that all appliances in the house (refrigerator, stove, dishwasher, washer and dryer) be included. After receiving the offer through Thomas, Alan and Ashley make a counter-offer of $210,000 for the purchase price, $200 per month option credit and an option fee of 2.5%, or $5,250, with a $750 security deposit. They agree to all of the appliances, except for the refrigerator which is brand new and they want to take it with them.
Getting closer to an agreement, John and Joan counter back accepting the $210,000 purchase price, but ask for a $350 per month option credit and an option fee of 2%, or $4,200, with a $500 security deposit. They agree to let Alan and Ashley take the refrigerator, but they ask for an 18-month lease and option period instead of 12 months to give them extra time to get their credit in order. (By the way, most tenant-buyers will require 18 months or longer. Very few buyers can repair their credit in less time with the current mortgage climate. Make sure you ask for enough time. The longer, the better it is for you, even if you don’t need it all. If you can get three to five years, I recommend you ask for it.)
Happy to have finally found a new home, John and Joan make plans to move in two weeks. Alan and Ashley are happy to have found buyers for their home and all agree to sign the paperwork in two weeks, giving Alan and Ashley time to move out.
When they meet to finalize the deal, they sign the Lease Agreement, the Option Agreement and the Sales Contract. Because the home was built after 1978, the home will not have lead in the paint. They must still sign a Lead Based Paint Disclosure (this is Federal law), as well as the Seller’s Disclosure form (property condition) as mandated in their state. Additionally, as part of a smart practice for rentals, they complete a Property Inventory/Check-in Check-out form (unit condition form), which simply details any issues or problems with the home at time of possession.
Here is a breakdown of the money that John and Joan need to bring the day of the paperwork signing:
Option Fee - $4,200
Security Deposit - $500
First Month’s Rent - $1,400
For a total of = $6,100
From this total, any deposit already paid at the time of initial offer in the form of earnest money would be deducted.
Once John and Joan sign the paperwork and give the money to Alan and Ashley, they can move in immediately, only 2 weeks after they reached an agreement!
During the rental period, John and Joan take steps to improve their credit score. They didn’t have enough money left to buy a new refrigerator, but were able to get financing on one. They were very careful to make all of the payments when due and pay it off in one year. In addition, they paid off two smaller credit cards. They diligently made all utility and other payments on time.
After 15 months in the home, John and Joan notify Alan and Ashley that they want to purchase the house. From the day they moved in, they took steps toward improving their credit and to work with their loan officer and apply for a mortgage. By making on-time payments and paying off debts, their loan officer is able to get them approved for the mortgage amount they need to buy this home. Home ownership is now within their reach.
How to Get Started
In the next section we’ll talk about finding your new home. Reading this book is a great start in the right direction. But you’ve got to get moving. Unfortunately, reading this book isn’t enough. You’ll have to actually take the steps to get things going.
We are going to go over lots of things in this book, and you won’t be able to do it all at once. I recommend taking it one step at a time, that’s the best way. Choose one step to put into action and do it. After you’ve done that one, choose another and do that. You’ll find it’s very easy to convert reading this book into action if you break it into small and manageable steps.
Take Baby Steps.
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