The federal government hopes to help low-down-payment home buyers, investors who fix up foreclosures, and communities burdened with too many bank-owned and foreclosed homes — all with one potentially far-reaching policy change.

The Federal Housing Administration revised its long-standing anti-flipping rules effective Feb. 1 and just might score a hit with all three target groups. For years, the FHA has had a strict prohibition: It wouldn’t insure a mortgage on a house if the seller had owned it for less than 90 days. The ban was a reaction to fraudulent quick flips of houses that inflated their values far beyond market worth. The flips often were pure cons: Buyer A would acquire a low-cost house in bad repair, make minor cosmetic changes and resell within days at a significantly higher price to Buyer B, who was also part of the scheme. The sequence could involve a string of serial flippers within a month or two, with prices spiraling upward.

The end game usually went like this: Find a hapless purchaser for the flipped house who would apply for a low-down-payment FHA loan. Typically, that buyer defaulted quickly — leaving the FHA with a foreclosed house on its books and a loss to its insurance funds.

The FHA maintained its 90-day anti-flipping rule through much of the past decade. But now it is suspending the policy, at least for the next year. In an advisory to lenders, FHA Commissioner David H. Stevens said the agency will again provide mortgage insurance for some purchases in which the seller had closed on the property less than 90 days earlier.

The objective, Stevens said, will be to speed up sales of renovated houses to first-time and other purchasers. With foreclosures at record levels — an estimated 2.8 million filings last year — many communities are faced with excesses of bank-owned properties sitting unsold, often in poor repair.

By waiving the 90-day rule, private investors will be more likely to bid on these houses, fix them up and sell them to buyers who will now be able to gain early access to FHA financing, which, according to Stevens, “is going to be absolutely terrific” for anyone looking to bid on a moderately priced post-foreclosure house in good physical condition. Some buyers will even be able to combine the $8,000 federal tax credit with 3.5 percent FHA financing — provided that their contracts are signed by April 30 and closed by June 30, when the credit program expires.

The FHA’s revised policy does not throw open the floodgates to all post-foreclosure renovations, however. Stevens laid down two key restrictions designed to protect end buyers and the FHA alike:

• No game-playing or conflicts of interest among buyers, sellers, realty agents or others involved in the deal are allowed. “All transactions must be arm’s-length, with no identity of interest” among any of the participants.
• Price run-ups must be relatively modest and justifiable from the time of the investor’s acquisition to what is paid by the applicant seeking FHA financing. Generally, the limit will be 20 percent.

Question: Do you feel this policy change will help investors, low-down-payment buyers, and communities with high levels of bank-owned and foreclosed homes?

Guest Post: FHA Takes Steps to Boost Foreclosure Sales is a post from: Purpose Driven Broker

Visit www.PurposeDrivenBroker.com for related posts.

Over the past month I’ve received a number of questions from both clients and agents regarding Lease Options. I’ve summarized the basics around lease option agreements in this post. I recommend that you speak directly with an attorney or your principal broker about the specifics of helping your client fill out the forms. Here are some of the highlights that I train my team on:

OREF Definition: Simply stated, an option is nothing more than an agreement by an owner to sell a property to a buyer for a fixed purchase price. The offer remains locked in at the fixed price for a certain period of time, during which the buyer can “opt” to buy the property for the agreed price – or walk away with no further obligation. During the option period the seller cannot revoke the offer, change the price or any of the agreed-upon terms, or sell the property to someone else. Obviously, there is value to a potential buyer to have this ability to unilaterally buy or not buy, and for this right the parties must agree upon the consideration – i.e., the price for the option, which is normally paid up front. An Option Agreement differs from a Sale Agreement in several ways, but one of the main differences is that the option consideration paid by the potential buyer is nonrefundable (assuming the seller doesn’t default under the Option Agreement), regardless of whether the buyer decides to purchase or walk away. If the option is not exercised by the buyer within the agreed-upon time period, then the right of purchase for the fixed price expires and the option consideration is retained by the seller.

Four Components: There are four major components to a lease option transaction. OREF provides agents with forms for three of the components and I recommend that you use these forms and have them reviewed by your client’s attorney. A standard lease agreement can be used and may be purchased from one of the local housing association offices.

1. Lease Agreement: This is the agreement between buyer and seller for renting the home during the option period. It will cover terms and conditions related to leasing the property and will be governed by the Landlord Tenant Law of Oregon.
2. Option Agreement: This is the agreement that spells out the terms and conditions of the buyer paying for the option to purchase the property in the future. It will summarize the terms of the lease agreement and layout the obligations of both parties as related to exercising the option at a future date.
3. Sales Agreement: This is the standard OREF real estate sale agreement that we all use every day in our business. It will spell out the conditions and terms of the future sale that will occur when the option is exercised.
   
4. Memorandum of Option Agreement: this memorandum should be recorded to protect both the buyer and seller. It should be reviewed by an attorney prior to recording and must be executed in the presence of a notary. It will put the world on notice of the option agreement between the buyer and seller.
   

Pros to a Lease Option Agreement:

1. Buyers are able to “experience” the neighborhood, schools, and amenities of the area before they actually buy in the area.
2. If there are credit issues, the lease period allows time for a buyer to repair their credit and save money for the down payment on the home.
3. A long term lease option may allow for a seller to “ride out” a declining market and be able to sell their home at the price they need.
4. Buyers may be able to negotiate with the seller to have a portion of their lease payment go towards the future down payment on the property.
5. Sellers may be able to charge above market rents to a buyer providing the seller with positive cash flow each month.

Cons to a Lease Option Agreement:

1. The seller’s underlying loans may have restrictions about leasing or renting the property. If this is the case both parties must be aware of the risk associated with a due on sale clause where the lender may call the underlying loan due upon receiving notice the borrower is no longer in possession of the property.
2. If the seller fails to make the mortgage payment the home may be foreclosed on ending the buyer’s hopes of owning the home.
3. Declining home prices may require the buyer and the seller to renegotiate the final price of the home when the option is exercised. The buyer may risk the money they have invested if they cannot come to terms with the seller on a new price. The seller may lose a buyer that decides not to exercise the option because of the declining prices.
4. As with any rental the occupant may not care for the home at the same level the owner does creating a situation where the owner must do repairs at the end of the option period if the buyer chooses not to exercise the option.
5. Rising interest rates may keep a buyer from being approved for a loan at the end of the lease term – even though he is currently approved to buy at the current price.

How Do You Get Paid?
Remember in Oregon you cannot be paid in advance for services rendered. You can however be paid for the cash flows that you create for your client. There are three different cash flows created with a lease option agreement. If you choose to be paid in one of the non-standard ways it will most likely not add up to the total commission you are due at the time of the sale. You are able to take these payments prior to the sale of the property as a credit against your commissions owed at the closing of the sale.

1. Gross Rents: The buyer and seller will sign a lease agreement for a specific length of time. You can be paid up front on the gross rents to be collected from this lease agreement. For example, the buyer and seller sign a 24 month lease at $1000 a month; you can be paid a percentage of the gross lease payments ($24,000). Typical rates for this sort of commission range from 4% to 6% depending on your market area.
2. Option Fee: The buyer will pay the seller an option payment for purchasing the right to have the option to buy the property. The option payment ranges from 1% to 2% of the agreed upon sales price but may be higher depending on your market. You can be paid a commission on the total option payment made to the seller. Commission rates typically range from 5% to 10% of this option fee amount.
3. Sale Proceeds: If the buyer exercises the option to purchase the home at the end of the lease (or prior), you may earn your normal commission on the sale of a home. This is how most agents agree to be paid and the commission rates that apply are those outlined in the Multiple Listing Data Sheet under the Buyer Agent Commission section (BAC).

There is much more to consider before consulting your clients on lease options, however, I believe its appropriate to just provide the above summary and allow you to work directly with your principal broker on specifics.

Question: Have you used a lease option this year? What was your experience and what did you learn about the process?

Make it a great day!

Coach Dan

www.PurposeDrivenBroker.com

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Lease Options – Please Help! is a post from: Purpose Driven Broker

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FHA-approved lenders received the go-ahead to develop bridge-loan products that enable first-time buyers to use the benefits of the federal tax credit upfront, according to eagerly awaited guidance from the U.S. Department of Housing and Urban Development on so-called home buyer tax credit loans that was released today.

Under the guidance, FHA-approved lenders can develop bridge loans that home buyers can use to help cover their closing costs, buy down their interest rate, or put down more than the minimum 3.5 percent.

The loans can’t be used to cover the minimum 3.5 percent, senior HUD officials told reporters on a conference call Friday morning.

Thus, buyers applying for FHA-backed financing with an FHA-approved lender that offers a bridge-loan program can get a bridge loan to bring down the upfront costs of buying a home significantly but would still have to come up with the minimum 3.5 percent down payment.

There remain many sources of assistance for buyers needing help with the 3.5 percent down payment, including many state and local government instrumentalities and nonprofit lenders.

In addition, some state housing finance agencies have developed their own tax credit bridge loan programs, so buyers in states whose HFAs offer such programs can monetize the tax credit upfront to cover all or part of their down payment. These programs are separate from what HUD announced today.

The first-time homebuyer tax credit was enacted last year–and improved upon earlier this year–to help encourage households to enter the housing market while interest rates are low and affordability is high. The credit is worth up to $8,000 and is available to households that haven’t owned a home in at least three years. The credit does not have to be repaid, and is fully reimbursable, so households can get their credit returned to them in the form of a payment.

Learn more about the credit, including how to apply for it this year even if you’ve already filed your taxes, at REALTOR.org.

Source: Robert Freedman, REALTOR® Magazine Online

HUD: Tax Credit Can Be Used on Closing Costs is a post from: Purpose Driven Broker

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