Expert: Matt Heisler - 8/12/2008

Question
Recently we put in an offer on the home of our dreams, but hit a dead end when the seller told us that she would not consider any offers from anyone that had not already sold their home.  We have been scrambling to see what we could do when we found out that friends of our's, who adore our house, were suddenly in the market.  We do not want to "sell" them the house, but simply give it over to them at our payments, which is less than what they could finance.  We had orignally been told about giving over our loan, but then told that it is not legal to do this anymore.  However, today I was told about selling a house "under contract".

Under contract was described to me as basically they pay us the monthly payment and then we pay it to the bank.  There is a contract involved which covers both sides and would normally have a balloon in it that states that after a set amount of years, they finance for the amount of the loan at it's current state.  It would also state that their payments during the course of the contract would be considered a down payment for the sale of the home to them.  

I have spoken to several people at work about this, none professionals, and several have done it or know someone who does.  However, I can not find any proper information on it on any websites.  I was told by a person who had done it before that there is websites to actually download the contracts for you to fill out and then have noterized, but again I can not seem to find them.  Is this all whispers in the wind or am I just not looking at the right sites?  Any advice would be greatly appreciated, especially if helps both us and our friends into the homes that we desire.  Thank you.

Answer
Franklin-

What you are attempting to do has several issues associated with it that I will try to address.  Let me start with some definitions.

Ownership:  When you are legally responsible for the home.  A person who is buying insurance for the home is usually the owner.

Leasing/Renting:  A situation where a person pay monies to a person who OWNS a home.

So, let's look at your situation.  If you put your house UC, under contract, who OWNS it?  Since the mortgage is still in your name, I would suggest that YOU are the owner.  (Let's say for example the house burns down.  Who collects the insurance?  YOU.)  What you're really talking about is a Rent-to-own situation, or something similar.  But here's the problem.  You haven't SOLD your house.  The reason the seller's won't sell you their house is because you're telling them (with the contingency in place), that you can't pay both mortgages.  They are figuring that if you can't sell your home, then you can't afford the next home.  This could very well be correct.  Are you sure that the mortgage company will loan you a new mortgage on your (soon to be) second home?  Because you still OWN the first one.

Let me give you some other things to think about.
1) The folks who are "renting" your home, with an option to buy, find another house, move out, and stop paying you rent.  What happens to you?  What is your compensation?

2) What they pay you is considered a down-payment - but you aren't keeping all of it, so that's a problem.  For example, if I have a loan for 100,000, my payments are $7200/year.  But some amount (lets say 50%, or 3600) is interest - it doesn't pay off the principle.  So out of the total "rent" payments, only 50% - MAX in this example - is really the down payment.

3) More issues:  The roof has a leak - who fixes it?  A septic system fails - who pays for it? Their kids eat lead paint in the home and get ill - are you liable? (Yes!).


As you can see, with the number of issues involved, I can't emphasize enough that YOU GET AN ATTORNEY AND NOT DOWNLOAD FORMS OFF THE NET.  Further, you need to talk to a mortgage person to see if you can even do this (rent-to-own and then buy a second house).

I'm not against rent-to-own, or being a landlord, but make sure you KNOW THE RISKS, the potential EXPENSES, and don't - DON'T - do it for free.  

If you don't want to be a landlord, sell them the house.  They won't be able to get the great financing deal you did, but how much difference are we really talking here?  $1000/ a year?  I think they will understand, especially if they want the house.

Be careful Franklin, don't wreck all that equity you've worked so hard to build up.


Sincerely,

Matt Heisler


Matthew D. Heisler
Heisler & Mattson Properties
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508.925.4626 (o)
617.755.3190 (c)
matt_heisler@heislerandmattson.com
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