Understanding Clauses – The Right of First Refusal Clause

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It is funny what kinds of deals or ideas come across my desk each and every day.  Just this week alone the concept of a Right of First Refusal (RoFR) has arisen at least two times.  These types of deals don’t usually show up but they can become quite powerful when needed.  They are not just part of real estate they can be seen anywhere when a seller wants to sell something and another party may want to buy that item.

If you are unfamiliar what a Right of First Refusal is as it pertains to real estate it is basically what the name states.  It means that the person who may be doing the buying (in this case a piece of real estate) the first right to buy when the seller is deciding to sell the property.  Thus, before another party (i.e., a third party) can actually purchase the property the person who has the right is given the right to buy it first.

Now as many of you know I have done a lot of lease option properties over the years.  And this may sound similar to the lease option.  However, there is some truth to that and there are some very strong oppositions to that as well.

It breaks down to a matter of control and who has the rights.  Let me explain the difference and then we will see when one of these may be the best choice for you when something comes up.

In a Lease Option the buyer is buying the right to buy a property at a price within a certain time frame.  They are usually paying a payment called an option payment in order to have that right to buy.  The tenant which is also now the buyer (often called a “tenant/buyer” or “buyer/tenant”) has the control in this contract.  Unless otherwise specified the tenant can “exercise their option” and convert the rental into a ownership at any time he or she wants.  They say I am now ready to buy and then they open escrow and the buying process begins while they are still living in the home.

rental agreement

Right of First Refusal will have a similar possible result yet control has flipped.  The tenant has expressed interest in buying the home they are renting and that is pretty much all there is to it.  However, the seller or owner of the home decides went the home is ready to go to market.  The tenant is given the first right to buy the home prior to it being listed or sold to a third party.  In the ideal scenario the tenant will exercise their right and begin the buying or escrow process.  But, if the tenant is not ready to buy then they give up this right and now the seller can move on to another party to purchase.

Here is the possible benefits to the would-be buyer even if they are not ready to buy yet the seller wants to sell.   I am not an attorney and I have only once played one on TV.  This is not me giving legal advice in any case and you should consult a local attorney to verify my words here.  If this seller wants to sell the home to another person and he has a signed rental agreement in place then that new third party buyer must honor the that rental agreement.  Thus, if they are still under contract the new buyer must be an investor.  A normal owner occupant buyer won’t be buying a home that they cannot occupy when they close especially if there is significant amount of time left on the rental contract.

This can be the main backup strategy for the tenant living in the home.  They cannot buy at one point in time yet now they can act fast to do whatever they need to do so that they can qualify to buy.

Here is another benefit of a RoFR versus the Lease Option.  In a lease option the tenant/buyer is usually putting down a significant non-refundable option payment (usually between 2 – 10% of value of home) to buy that right to buy.  That is great because it is giving the upper hand in the transaction.  However, if you don’t have that money to put down then a Right of First Refusal can be the next best thing.  In a RoFR you are doing a regular rental with the regular refundable deposits.  So, no extra money out of your pocket.

When I was with my clients earlier this week they were on the fence of renting versus doing a lease option on the same home.  I mentioned this strategy to them.  This could be a way to see if they like the area without putting down that much money.  Yes, if they don’t buy they will eventually have to move.  But, they didn’t risk the big money.  Yes, they give up control so that could be a downfall.

I hope this helps you in your future.

Happy Investing!

Kevin Dunlap

#leaseoptions #renttoown #rent2own #tridentinv #kevindunlap

Discounted Listing Agent – Good or Bad Idea — A Realtor’s Perspective

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Today I was approached by a seller that I have had many years of communication with however there has been no actual deal that we have opened and closed together.

Here is how it goes.  I will refer to this person as Jack.  On and off for the past 3 or 4 years I have had a few dealings with Jack.  Many times as a buyer of a new home for him and his wife.  I have showed them 2 bedroom condos and 5 bedroom semi-luxury homes.  Prices ranging from $120,000 condos to $500,000+ homes.

Jack and I have also talked about doing a lease option on one of his investment homes which was a previous model home in an exclusive area of Las Vegas.  None of these deals have ever worked out.

Then a few days ago I was approached by Jack that he was considering selling his home.  He wanted a certain price point which I thought was a little above market even though it was a former model home from the year 2000.  I was excited to hear this even though we are beginning to go into the slower holiday season for real estate in this area and the fact that the home is tenant occupied until later November thus making showing arrangements difficult or non-existent.  Thus, starting off with three strikes already against me: 1) above market price; 2) wrong season to be selling a home around $500,000; and 3) not able to see the interior.

There are ways around the aforementioned strikes.  I could use pictures from prior to the tenant’s moving in and say that the current condition of the home is the same as previously, which is a true statement.  And possibly talk about all of the upgrades to warrant above asking price.  Okay, that does make my job more difficult, but okay I am open to taking on a challenge.

Then today comes around.  I call Jack about meeting up to gather pictures, possibly take a tour of the home to see its current condition, and possibly to talk nice with tenant to see if it is okay to show the home with a 24 – 48 hour notice.  Some tenants can get temperamental when they are in the middle of packing.

Then comes the topic of commissions.  First of all Jack wasn’t to concerned with the Buyer’s Agent commission — I guess he thought buyers pay their own agent on all transactions.  Then when we talked about a 5 – 6% standard commission he was flabbergasted.   He wants me to list the home for 1% and also only give the other agent 1%.  I guess he has seen to many signs on the road about Discounted Brokerages that offer to list at 1%.

Now I don’t know about you but 1% is a difficult pill to swallow.  And to have the other agent also see 1% on the buy side will make many agents not only not show  the home, it will also cause them to lash out against me.  I have had agents who have called and asked if the commission was for real on other deals (not 1% ones) and essentially just spit at me on the phone or laugh.

I get it that in today’s technology makes things a lot easier for the listing agent.  However, as a duty to my craft and industry I do find this request to be insulting and demeaning.  I take it that sellers are not aware of the costs for every real estate agent out there.  They are not aware that there are fees the agent must pay to their brokerages (flat fee for some and percent commissions to others).  There are fees to hire a transaction coordinator whose sole purpose is to ensure each transaction is done effectively and accurately.  There are fees that agents must pay annually for the use of the MLS.  There are fees we pay to the Board of Realtors.  There are fees that we must pay for maintaining our licenses.  There are fees for advertising, marketing, putting a sign in the yard, etc. etc. etc.

This post is not about complaining and all of that.  To me it is about respect for the industry.  As a listing agent I want to get the Seller, like Jack, the best and highest price possible.  For the buyer’s agent I know they are wanting to get the best deal (lowest price or best terms) for their client.  Our job as professional Realtors is to do more than just list your home.  If that was the case then hire a discounted brokerage.  See what they have to offer and go with them.

If you want a professional service then be willing to pay for it.  In some cases principles matter more than money.

The purpose of this blog post was to get focused on what I should say to Jack.  This is a multi-year (non commitment to any dealings yet) relationship.  I have even helped show his son some homes for sale (which he decided to rent another place for at least a year).

I could react with an emotional response yet that would not be professional.  A professional behaves above their current emotional thoughts.  A professional is a professional through and through.

My take on this is to renegotiate the terms Jack is offering with what I feel is a fair middle ground.  If he takes it, then so be it.  If he refuses then off to greener pastures with people who do take action.

Thank you for your reading.

 

Kevin Dunlap

Realtor, Speaker, Author

 

Should I buy now or wait

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Over the past several years I have noticed a steady increase in housing prices generally across the board.  Title company sends out updates on a map annually as to how the previous year performed by zip code.

Across the board for at least the past two years there have been steady increases in the market.  As of the date of writing this article we currently see approximately 9000 homes, condos, and townhouses for sale in the Vegas valley area.  Out of which approximately 400 are short sales and an additional 300 are bank owned foreclosures.  This means out of the 9000 for sale 700 are distressed or about 7.8%.

In a desperate economy this number would be much higher.  When I obtained my Realtor license back in August 2012 this number was much more grave and was much higher.

Housing prices are still steadily increasing overall.  This, to me2015 Appreciation Map

Here is the 2015 appreciation map shown by zip code.  Depending upon the zip code there can be wide range of price changes.  This map does not indicate actual price values nor does it show the appreciation rate.  This is the relative price change reflecting all sales in the zip code.  Thus, an inexpensive home that may have changed from $175,000 to $200,000 (12.5% increase) is compared with the same home which changed from $1,000,000 to $1,300,000 (30% increase).  Thus, these two would be averaged together to get a 21.25% change if these were the only two homes sold in the zip code.

The question that most people ask me is should I buy now or buy later.  Well, that is a difficult question to answer without having a crystal ball in the future.  If interest rates stay competitive and low then you may want to take advantage of that today and save money in the future just because of the low interest rates.

The second concept to consider is that will housing prices keep going up?  If they do at this same rate then you could expect to pay 10% or more for that same house a year from now.  Thus, that $200,000 home today would be $220,000 a year from now and assuming the same interest rate would be $242,000 in two years.

With an increase in purchase price and an increase in interest rates could price you out of the market if you wait too long.

However, playing the naysayer and assuming prices don’t go up in the future you may still have to wonder about interest rates and if they will increase.

There is always uncertainty in an election year as well.  Especially one after a double term presidency.  Markets can fluctuate greatly waiting or expecting what a new presidency (or change of party) will do to the economy.

My suggestion for all of those who are sitting on the fence on buying should really take a close look at your credit, your income, and your buying ability.  Then speak with a good lender about your buying options.  If you are able to buy then get the ball rolling.  If you are not able to buy because of credit or some other issue then a lease option may be your next best choice. Because in a lease option you are buying the right to buy at a later date or time.

Whichever you decide make sure you have all of your information together and in place so you can make the right decision.

And if you decide that starting on the road to home ownership is right for you then you can move forward with confidence that you are doing the right thing.

Good luck in your purchase.

Kevin A. Dunlap

Realtor, Investor, Entrepreneur

Founder of Trident Investments Group, The oldest creative real estate company in Vegas

What do I need to know when buying on Seller Financing?

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Buying a home where the seller is willing to finance the home for you is a great way to get into a home without having to be ran through the wringer like a traditional bank may put you through.   When the seller offers this there are a few things you will need to know.

As a Nevada Realtor I do these from time to time.  There are a few things you as the buyer will need to know before getting involved in one of these.  Some may be to your benefit and others may not.  This is a personal judgement call.

The most common question I get from potential buyers is about how much is their payment going to be.  Well, that is what will determine at the finish line yet it is not the actual value we are looking at from the onset.  Instead, we need to know other things like purchase price, length of the loan, and the interest rate.

Quite frequently the interest rate is the value we need to know first.  That is one of the major factors that determine the monthly payment.  The other three critical factors are the loan amount, length of loan, and type of loan.  There will be other factors yet those aren’t as critical to know upfront.

In many seller financing situations the seller may be asking for 20% as a down payment.  This is similar to the standard investor loan an investor would get when purchasing an investment property.  Plus, the seller wants to ensure you are committed and asks for values around this range for what they call having “skin in the game”.

This amount of a down payment can be quite substantial to a buyer.  However, if the buyer does not want to try to qualify via a bank and they have this type of down payment then this would be perfect for them.

The next value to know is the interest rate.  Most sellers are not going to even remotely try to compete with the banking industry and they will typically charge higher rates.  So be ready for those numbers to be higher than normal banking rates.  These rates can range from 7% up to 12% or higher.   For the owner occupied home buyer you may only want to entertain these kinds of rates for a short time.  Thereby, either refinancing into a better bank rate later when your credit improves or sell before the loan matures.

The next major item you need to know is the type of loan.  There are two main types of loans out there.  One, which is typically the one used, is a principle and interest loan.  The second is the interest only loan.  The first one means you are paying both principle payments (reducing the loan balance every month) and interest payments.  The second one is just making interest payments.  There is something you must understand in determining which is best for you.  The second interest only payments will keep your monthly payment lower however you are paying more for the home than the first method.

In the first method you are paying both principle payments and interest payment.  The principle payment is also called principle reduction.  The first month’s payment will have the most going toward interest and the least going toward principle.  The second monthly payment (which is exactly the same throughout the course of the loan) a little more goes toward principle reduction and a little less goes toward interest.  And this continues for the life of the loan.  At the end almost all is going toward principle and very little toward interest.  This will also be known as an amortization schedule which is based on the compound interest equation.

The interest only payment is less per month as there is no principle reduction portion that is added to the loan in the first type.  The reason you pay more on this type of loan is because there is no principle reduction going on.  The interest is calculated on the total amount borrowed instead of what is left to pay.  Thus, in the principle & interest type of loan that little bit less going toward interest every month lowers your interest amount continuously every month.

Therefore, after a few years that amount can become quite substantial.

Most loans are based on the principle & interest amortization schedule.

The last major aspect of determining the loan is the length of the loan.  We can assume that most loans are based on a 30 year principle & interest amortization schedule.  In the seller financing world this is often the same concept.  However, most sellers do not want to wait 30 years in order to get fully paid.  They will often put in what is known as a “balloon payment”.  This means after a certain period of time that the entire remainder portion of the principle would be due.  Typical seller financing terms have a 5 – 10 year balloon payment.

If we assume that you had a 5 year balloon then this would mean that after 5 years the remainder of the principle would be due.  That means on the 60th payment you would have to the entire loan off in full.

Now don’t let the balloon payment scare you too much.  Usually the buyer will either refinance or sell the home prior to the balloon payment date coming due.  You definitely need to be concerned and you must be aware when that date is coming up.

To recap on the main things you need to be aware when doing seller financing are:

  1. Purchase price
  2. Down payment (typically 20%)
  3. Interest rate (typically 6 – 12%)
  4. Type of loan (P&I or I.O.)
  5. Balloon payment (and amortization time frame)

If you have a good down payment then seller financing may be for you.  There are many advantages of doing one of these.

Also, seek guidance before doing this on your own.  There are other factors that need to be considered when doing these.  Other items to be considered are 1) when is the payment considered past due; 2) penalties for late payments; 3) impounds – who collects and pays for taxes and insurance; 4) what happens after 30 days late; etc.

Lease Option Advantages to the Tenant/Buyer

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Imagine that you have just moved to a new town.  You may have good credit or not.  Yet you have some savings.  You don’t really want to be a renter yet you cannot qualify for a loan just yet because you are new to the area.  What are you suppose to do?

That is the beauty of a lease option (also known as a rent to own).  You are putting down a minimal payment on a home that you do intend to buy when you can qualify.  It requires what is called an option payment (not to be confused with a down payment even though they are very similar).  This option payment ranges from as low as 2% of the purchase price of the home to as much as 9 or 10%.  This payment, however, is applied toward that eventual purchase of the home.  It can be considered a seller’s concession up to a certain amount where the seller is paying your closing costs and some of your down payment.  Any remaining monies will come directly off of the purchase price.  This may mean writing an addendum to lower the original price as per your bank lending requirements.

The other beauty is that you don’t have to move when you are able to buy.  You can buy at any time that you are ready.  Typically I see two year options with the right of extensions.  Let’s say you can qualify in 18 months and you are doing a 2 year option.  Thus, around the 18th month you begin the buying process.  If there are delays on your closing, no problem.  No worries of telling a landlord you need two additional weeks because of things.  No worries with the seller as they would actually make a little more money on the extra rent.  And no worries for yourself stressing out over the whole situation.  You are already living in the home you are buying.

Also, in most cases you are also receiving a monthly rental credit from each of your monthly rental payments.  This is actually called a “rent credit”.  This is the monthly bonus you are getting each and every month that is applied toward the purchase of the home.  This enhances a timely payment to the landlord and is also a way that you are saving more toward the eventual purchase of the home.

At the time you are buying the original option payment and the monthly rental credits are tallied up and this goes toward the costs of you buying the home and the actual purchase price.  In many cases when you are ready to buy your costs are minimal to zero.  You have already prepaid those costs.

For more questions on how a lease option works please feel free to contact Kevin from this website.

Happy Investing,

Kevin A Dunlap

Owner/Manager Trident Investments Group and Rent2OwnLV.com