Las Vegas, NV Real Estate: Owner Will Carry (OWC) and Lease Options

By
Real Estate Broker/Owner with Savvy Home Strategies Realty, LLC-REALTOR®-Estate-Probate B.1000860.LLC

This is a primer (not intended legal advice, just my astute market observations as a real estate licensee in the state of Nevada) for anyone who is looking to Purchase or Sell using one of these types of financing.  This post was prompted by Jeff Turner's most excellent post in response to a FSBO.  This is a MUST READ.

Definitions:

  • Owner Will Carry:  Commonly referred to as "OWC".  This means the seller will hold the note.  Buyer usually must come up with a 10-20% down payment.  Interest rates are usually higher than normal mortgages, depending on usury laws in your state.
  • Lease Option to Purchase:  Commonly referred to as "Lease Option".  This means that the house is currently being rented out with an option to purchase at the end of the term.  Terms can be flexible.  Option deposits  range generally from 3-5%.  Option deposits are generally:  a)forfeited at the end of the option term if the option to purchase isn't exercised or b)applied towards closing costs or down payment if purchase option is exercised.  This MUST be written in the contract!!!  Monthly rental rates are generally higher than market rates and sometimes a portion of that rent gets applied towards down payment or closing costs.

For Sellers:

  • OWC:  Base the down payment and interest rate (per your state's usury laws) on credit.  SEEK THE ADVICE OF AN ATTORNEY and have the attorney write the note.  As a Realtor, I would NEVER write a note myself or use a canned form you buy at a local office store!  Treat this type of purchase as a souped up lease option.  You also run the risk when changing title of new liens being added to the property.  Make sure property use is clearly defined.
  • Lease Option:  Make sure the option period is short and cannot be reassigned.  Make sure price is clear.  Make sure what happens to the lease option deposit is CLEARLY DEFINED in the contract.  These should be treated like a LEASE and like a PURCHASE.  There should be a leasing contract and there should be a purchase contract.

Thoughts and reflections on both of these financing types: 

If you don't know what you are doing you will be preyed on by what I call "the unrentable".  The "unrentable" usually have extremely poor credit and are living on (what I call) Noah's Ark.  Noah's Ark means they have a plethora of animals and more than likely one or more of them are on "banned breed" insurance lists.  Your insurance could be dropped and your home may become uninsurable on the C.L.U.E. report if your insurance company has banned an animal breed and they find out.  Generally if these types of people were to do a normal lease or rental home, they would be required to double or triple their security deposits and their monthly rent could skyrocket.  So their thoughts are "why not a lease option or OWC."  They pretty much have to come up with the same $$$.

These types of transactions can be done with success.  You just need the correct purchasers.  The real reason behind a lease option would be someone who is speculating and doesn't want to risk in a declining market or they are new to the area and just want to test drive.

Lastly, make sure you DO NOT HAVE A MORTGAGE ACCELERATION CLAUSE in your note.  Most lenders do NOT lend to allow this type of financing and you could possibly have your mortgage accelerated if they find out you are doing this!

For Buyers/Renters:

  • Get a lawyer and protect yourself from scams!  I was bumping around on a major auction site (starts with an e) last week and was AMAZED at the amount of scams out there.  I even checked title on some of them and what I found was atrocious!
  • Escrow the funds that are held as down payments and lease option deposits.  Many homes in the Las Vegas area are getting foreclosed on and I would say a majority of people getting foreclosed on are renters.  The best way to protect your deposits and down payments would be to have a licensed and bonded escrow company HOLD those funds and even make the monthly payments in regards to anyone who can put a lien and foreclose on the property.  (Mortgages, HOAs, Taxes, Liens, Sewer, Garbage, etc etc etc)

Now if you still haven't read Jeff's posting, go read it now and I will wait.  tap, tap, tap, tap.

You are back, great!  I am simply amazed by how many people called replied with advice that this person needs a Realtor.   You can do this type of transaction WITHOUT a Realtor, and rather easily if you understand and do your due diligence (either buyer or seller!)  What you do need to do one of these transactions is AN ATTORNEY who SPECIALIZES in these types of transactions.  There are scams on both sides, folks!  When I do these types of transactions an attorney is a MUST once I procure the buyer for a seller or vice versa.

It is easy to procure a potential buyer for ANY of these types of financing.  What isn't easy is qualifying and making sure they are doing it for the right reasons!

Posted by

Thanks,  Renée Burrows 702-580-1783 Broker/Owner, REALTOR®
 

 

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Ambassador
551,432
"The Lovely Wife" (Broker Bryantnulls Wife) The One And Only TLW.
President-Tutas Towne Realty, Inc. - Kissimmee, FL

Renee...

You appear to be one of the few who actually 'got it' :)

I am amazed by some of what I read on that post.

Thanks for having a brain my friend :)

P.S. Notice how I didn't say anything? Wondering Why? Cuzz...I knew they wouldn't get it :) 

TLW...ROAR!

Apr 29, 2008 01:23 PM #1
Rainer
213,041
Doreen McPherson
Homesmart ~ Scottsdale ~ Tempe - Tempe, AZ
Phoenix Arizona Real Estate ~

What TLW said.  :) 

I have done this before and it works, but you have to protect yourself.  I sold my house this way years ago, when interest rates were really high.  

Apr 29, 2008 02:50 PM #2
Rainmaker
753,321
Larry Brewer
Benchmark Realty LLc - Nashville, TN
Nashville Real Estate
Renee - Great response - I thought about it, then decided that I was too sick with a cold to waste my energy by responding to Jeff's post.
Apr 29, 2008 04:44 PM #3
Rainer
7,769
Alan Robinson
PTE REAL ESTATE GROUP - Phoenix, AZ
I agree that it works but it's not a process everyone is capable of handling. With the market being shaky it isn't necessarily the best move. 
Apr 29, 2008 06:07 PM #4
Rainmaker
119,559
Gary McNinch
Better Properties Real Estate - Renton, WA
Broker, Renton WA Real Estate

Renee,

Thanks for the positives and negatives.  I've seen a couple times lately where agents haven't done their due diligence and left the client hanging out.  We have MLS form for both these types of transactions, but they are boilerplate and don't cover all the issues. Both homes are now listed and messed up.  

List and Sell (and use an attorney when it makes sense)  Gary @ RentonHomeFinder 

Apr 29, 2008 06:26 PM #5
Rainer
184,112
George Tallabas
RE/MAX Advantage - Nampa, ID
Idaho Real Estate
Very true Renee....I hope all is well in your neck of the woods.
Apr 29, 2008 06:49 PM #6
Ambassador
1,478,385
Renée Burrows
Savvy Home Strategies Realty, LLC-REALTOR®-Estate-Probate - Las Vegas, NV
Las Vegas Real Estate Broker - www.urLVhome.com

TLW:  Sometimes I feel like parking, sometimes I feel like barking :wink:  Sometimes you gotta get to know your author and what he knows about "the juice" and giving handouts.  Little gifts of manna from heaven :)

Doreen:  It can be absolutely effective if you know what you are getting into!

Larry:  I hope you are feeling better soon!  Go get em tiger!

Alan:  It can be a great move, especially in a shaky market.  I hope I can encourage Doreen to write about her experience that she mentioned above!

Gary:  I have one lease option contingent and will probably close early.  :crossing fingers:  It was the right situation for all parties!

George:  Thanks for stopping by!  All is well as I hope it is with you too!

Apr 29, 2008 08:40 PM #7
Anonymous
Anonymous

Renee,

I would actually suggest that a lease purchase buyer needs a Realtor more than a traditional buyer. Over the past two years more than 5,000 tenant buyer applications have passed thru our company in Atlanta and I can safely state that  their real estate knowledge/experience level is rather low.

For sellers I would strongly advise against OWC - way too risky as foreclosures are a lot more messy and time consuming than evictions.

Great blog!

Ivan 

 

Apr 29, 2008 08:41 PM #8
Rainmaker
175,303
Rebecca Levinson, Real Estate Marketing and Online Advertising Consultant
Real Skillz-Clear Marketing for Your Real Estate Vision - Lake Geneva, WI

Renee,

I missed Jeff's original post, but thanks for pointing me in that direction.  Lease options were more common when financing was in the double digits, and also just after the Great Depression.  That is actually how my grandparents purchased their first and only home (I know, what a rarity these days, imagine staying in the same house your whole lifetime).

Anyway, while the issue Jeff discussed was from a concern issued from a seller, and I certainly agree with your points above, a real estate buyer has to be careful as well.  Lease options can be a good way for a buyer to get into a house that doesn't meet credit guidelines where they are at today, but still has a good income and steady job history, but they can get screwed on the downpayments and interest if the contracts aren't written correctly.  That is why, as you have stated above, the two contracts, one for lease and one for purchase, are so important to a buyer as well.

The attorney part shouldn't be optional, it should be a must.  So necessary to the transaction, but we do live in the age of DIY.  How about some CYA? 

Apr 29, 2008 10:07 PM #9
Rainer
39,520
Matt Yogerst
RE/MAX Realty 100 - Menomonee Falls, WI
Metro Milwaukee Real Estate
We do numerous Lease Options in our office. It is just me and my broker/attorney. We mainly service investor clients, and a number of them are rehabbers. They have turned (quite successfully too) to doing a lease option on the backend to buyers. This allows them not only more flexibility with buyers, but also a higher sales price. It really can be a win/win, but for most homeowners it is more of a last resort if they can't sell conventionally. The investors don't mind since they collect the deposit, and if they do take the property back, they can just touch it up and resell it. Of course that is if the tenants didnt trash it! An agent isn't needed, but one should set up papers with an attorney for the first few transactions (for the investors).
Apr 29, 2008 10:52 PM #10
Rainmaker
264,568
Wayne B. Pruner
Oregon First - Tigard, OR
Tigard Oregon Homes for Sale, Realtor, GRI
This is a very good explanation of these more exotic forms of financing that appear in a down market. These can work if done properly.
Apr 29, 2008 11:12 PM #11
Rainer
125,575
Hope Goss
Ventura Property Shoppe - Ventura, CA
Ventura Real Estate

By hiring a Realtor, and marketing his home to the largest audience, he may not be considering seller financing!

Apr 29, 2008 11:42 PM #12
Ambassador
739,304
Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

Renee..... any buyer doing a OWC would have to have very, very poor credit. Gee, just with 10% down, lower rates, and with a credit score of 500 could be a FHA client. Now, the credit has to be decent, but define decent. Each client is different and case by case.  But I am closing on two different clients... one has a 504 score and the other has a 523 score. Just some food for thought. The reason why I am saying this is because people should be aware of this and not just assume, if they think their credit is that bad.

Overall, some good explanations in this post.

jeff belonger
Apr 29, 2008 11:47 PM #13
Rainmaker
200,409
Emily Lowe
The Lipman Group Sotheby's International Realty - Nashville, TN
Nashville TN Realtor
I have a lady right now who wants to "try out" a neighborhood with a lease/purchase.  Not sure if I understand this mentality.  Scared of committing to a real house payment maybe?
Apr 30, 2008 09:00 AM #14
Rainmaker
574,889
Neal Bloom
Keller Williams Properties, Weston FL - Weston, FL
Realtor CRS-Weston FL Real Estate

Renee,

I don't see these types of programs in FL...seems as if they just want a straight deal with no bells and whistles....I guess they would rather not play banker.

May 01, 2008 06:41 AM #15
Rainer
122,017
Christy Powers
Keller Williams Coastal Area Partners - Pooler, GA
Pooler, Savannah Real Estate Agent
That's a great widget. It's hard to miss! I loved the post. It's definitely something available and a good option!
May 01, 2008 09:49 PM #16
Rainer
26,435
Diane Concialdi
Westminster, Huntington Beach, Orange County - Westminster, CA
DC Redesign Real Estate, Staging & Conceptual Design

I've seen, heard, found that Lease Options are getting pretty popular in CA.  Know a Realtor who only does lease options but requires a pretty big down payment. Great explanation, Renee!

Diane Concialdi

Jul 31, 2008 09:13 AM #17
Rainer
5,375
Cynthia Luna
Windermere Prestige Properties - Las Vegas, NV

Me and my husband entered into a lease option agreement where we were provided with year old HOA docs a month after signing, no SRPD, no RE disclosure guide, and etc.  We found out a few months into it that the condos assc was in the middle of a construction defect lawsuit that we had never been informed of prior to handing over our $5000 for the lease option.  I had specifically asked the leasing agent if there was a lawsuit and he had told me NO prior to signing.  At the end of our lease option when we had exhausted our financing options, we asked the owners for the deposit back since they had not been honest and the contract was voidable- they infatically said NO and that the contract stated that "under no circumstances will the deposit be returned".  I said that obviously that does not include situations where the parties knowingly lie and try to defraud people in tough financial circumstances and makes the contract voidable.  People who do lease options to begin with are not in a current position to buy traditionally but able in the future.  With this undisclosed defect, we could no longer qualify for FHA or any loan with less than 20% down.  It is unreasonable to think that this information was materially important to us ever signing to begin with.  We are in the midst of taking them to small claims court in NV.  Any advice on how to win our case or any case law to reference?

Oct 27, 2008 01:25 PM #18
Ambassador
1,478,385
Renée Burrows
Savvy Home Strategies Realty, LLC-REALTOR®-Estate-Probate - Las Vegas, NV
Las Vegas Real Estate Broker - www.urLVhome.com

Ivan:  Thanks!  I would recommend against all options, none are safe from foreclosure.  Unless all monies are escrowed.

Rebecca:  Agreed on all counts, ESPECIALLY the attorney!

Matt:  Agreed also and thanks for your input on the right way to do it!

Wayne:  Agreed again!

Hope:  As mentioned above, you can generally ask for more $$ if you have a wider audience!

Jeff:  Not necessarily bad credit but the house could have some issues that make it unfinanceable in the real markets.  Maybe some mold, electrical problems, etc.  Maybe the buyer wants to get the home up to speed with their own resources before financing it!

Emily:  Could be!  We have a ton of "test drives" with newcomers to our market.  They normally rent the traditional way, however.

Neal:  I wouldn't :cringe:

Christy:  THANKS!

Diane:  Most can't produce so if you can manage a large option payment then when turnover happens you just get another :)

Cynthia:  My best advice to you would to be get a lawyer!

Nov 03, 2008 11:01 AM #19
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