If you are one of the New York homeowners currently struggling with your mortgage, you may fear that foreclosure is inevitable. However, there is a very advantageous alternative you may not be aware of, called a lease option. This could enable you to avoid foreclosure, even if the foreclosure process has already started.
What Is A Lease Option?
The way a lease option works is by an investor taking a lease with an option to buy on your home. That is, the investor will lease your home for a number of years, usually three initially, making monthly payments which are at least equal to the payments you have to make on your house. In addition, the investor will make you a nonrefundable payment of a sum of money, called option money, to secure the right, though not the obligation, to purchase your house at the term of the lease. You get to keep this money, which is equivalent to several months’ rental payments, even if the investor, or the investor’s tenant, decides not to purchase the house.
If you decide to enter into one of these arrangements, it is a good idea to consult an attorney, to ensure it complies with New York law, as each state has its own laws concerning lease options. If you can’t afford to get legal advice, at least make every effort to ensure you are protected. In particular, get an agreement in writing, as New York law does not allow oral agreements. It is important to ensure the option has a clear ending date, and check the agreement makes clear that the option to buy is canceled if you have to evict the tenant-buyers for nonpayment of rent.
Rent To Own
There are a few variations on a lease option, which you may also find advantageous. A rent to own or lease purchase agreement is similar to a lease option, with the difference that the tenant buyer does have an obligation to purchase, within an agreed time frame and at an agreed price. In order to protect you against a default, the tenant buyer has to make a payment to you called earnest money, which is nonrefundable in the event of a default. If the purchase goes ahead, the earnest money forms part of the down payment on the purchase price of the property.
Sandwich Lease Option
Another variation is the sandwich lease option. This can be used when the investor, instead of becoming the tenant-buyer in a rent to own arrangement, acts as the middleman for someone else who wants to use this arrangement. So the investor has taken the house on a lease option, but is in turn renting out on a lease purchase agreement. You will benefit from this because, as well as paying you the option money for the lease option, the investor will also be paying you the earnest money for the rent to own agreement.
How You Can Benefit
In fact, there are all sorts of reasons why a lease option, or a similar arrangement, can turn out to be an ideal solution to your situation. For a start, the monthly payments you receive will as a minimum cover your PITI (principal, interest, tax and insurance) payments due to your lender — usually the investor will make these payments direct, and forward you the check for the balance. You can stipulate in the agreement that the investor guarantees to make these payments whether the property is vacant or not. An additional benefit is that the tenant has a vested interest in the home and will look after it well. Some investors guarantee to pay the first $100, or $200, of any repairs.
In addition, because there is high demand for lease option properties, you will almost certainly receive your full purchase price, or more. Further more, unlike trying to sell your house by traditional means, it can be really quick — it will normally be completed in days or weeks, not months. This means that you can get money now get and get money later when the buyer exercises the right to buy. There is also another benefit you may not be aware of, which is that IR code 121 states that you can keep your $250,000 tax exemption, provided you have lived in the house for any two of the five years prior to the sale. This means you can rent out the house for up to three years after you move out, and still keep your tax exemption.
Whatever your reasons for struggling with your mortgage, you will be worrying and losing sleep. Giving an investor a lease option can turn your situation around in a short time. Not only will you be relieved of your debt, you will have real peace of mind, knowing that the people living in your house are looking after it as if it were their own.
