The Town Broker

Archive for the 'Real Estate 101' Category

Re-Thinking The Home Sale Contingency

The home sale contingency (conditioning an offer upon the sale another property) has been part of real estate contracts since…well… since there have been real estate contracts. Unless you can afford to carry one property and still qualify for the purchase of another, a home sale contingency is a fact of life.

But when making an offer on a home, buyers should do everything they can to make their offer look better than the rest. There are a lot of ways they can do this. They can put more cash down, make a larger downpaymnt “up front”, or even waive some of the traditional contingencies…like home inspections. (Although I strongly caution most of my clients AGAINST this one. Unless you’re an experienced builder/investor who knows what ”deal breakers” to look for, the down-side risk is just too high.)

When marketing a home, sellers are looking for ready, willing and able buyers. But if you really need to sell first, you’re not really an able buyer…at least, not yet. When the market was blistering hot, having a home sale contingency was the “kiss of death”. The idea simply makes a lot of sellers a bit nervous. What happens if their house never sells? Isn’t it better to accept a contract that doesn’t have this additional condition built in?

Possibly. But in today’s slower market environment, I think it’s time to re-think the home sale contingency.

Slower Markets Demand Flexibility and Creativity

Let’s face it…the local housing market hasn’t really been tearing it up lately. As the graphic below shows (data courtesy of the GSMLS), 2010 has seen fewer contracts written in Westfield than in most of the previous few years. And since the home buyer tax credit disappeared on April 30th, things have really slowed down. Incidentally…if it wasn’t for historically “stupid low” mortgage interest rates, I suspect that August 2010 would have under-performed all of the previous years as well. So what is a home seller to do?

Accepting Contingent Offers By Adding A “Kick Out Clause”.

Increasingly, home sellers are beginning to recognize that any offer is a good offer. And while the terms sometimes need to be negotiated in order to get something acceptable to all parties, no offer from a qualified buyer should be considered insulting in this market environment.

Assuming that the price and all other terms are acceptable, many sellers WILL now consider accepting an offer with a home sale contingency. But in order to protect themselves, they’ll have their attorney add what we call a “kick out clause”. (And yes, this really needs to be done by an attorney and not your agent. As much as I’d like to help, I don’t have legal authority in NJ to alter the standard real estate contract in this way. In my view, it gets into that area known as “practicing law with out a license“…a big no-no for all licensed real estate folks.)

The kick-out clause gives the seller the right to continue to actively market the home, and search for an offer that does NOT require the home sale contingency. If they get such an offer, the 1st buyer…who still has a legally binding contract…has a limited amount of time (usually about 48 hours) to remove their contingency. If they can do it, they stay in the deal. If they can’t, they’re offer is thrown out and the seller moves on to the new contract. (This is where buyers need to think outside the box. Is it possible to get a very short-term loan from a family member until your house sells? Is it possible to temporarily borrow from a retirement account?)

There is always the chance that as a buyer, you could end up losing the home of your dreams to another non-contingent offer. I guess this makes the case for making absolutely sure that your home is properly positioned to sell quickly.  But if you find the home of your dreams before you sell, it’s still worth making an offer and not letting it get away!

For additional information on this topic or any other real estate need, contact Hal Benz -Your Home Sale & Short Sale Specialist. 908-216-4836

Tags: Home Sale Contingency

The $28,000 Home Buyer Credit?

Well…kinda. You’re probably aware that until this past April, the IRS was offering an $8,000 Home Buyer Credit to qualified first time buyers and a $6,500 credit to trade-up buyers. And when the program disappeared on April 30th of this year, so did the housing market in much of the country.

But what you may not realize is that since this program expired in April, home buyers have received a much less publicized $28,000 home buyer incentive. And this one is for ANY buyer who is qualified to purchase using a 30-year fixed rate loan. How are these savings earned? Through reduced mortgage interest. Let me explain…

Mortgage Interest Rates Are At All Time Lows.

That’s right…mortgage rates are low…”stupid low”…unsustainably low according to most market analysts. At the time of this post, Freddie Mac shows the national average on a 30-year fixed mortgage to be 4.36% with 0.7 points. (Actually, TODAY I had some mortgage guys telling me they could do 4.0% with ZERO points!!)  When the Home Buyer Tax Credit expired in April of this year, Freddie posted the national 30-year fixed average at 4.74%, with 0.7 points. So what does all this mean?

It means that if you bought a $350,000 home (yeah, that’s a starter home in our local market) at today’s rates instead of the rates in April…just 4 months ago… you’d save $79.26/mo. in mortgage interest. That’s a savings of $951/yr. and an AMAZING $28,533 over the life of the loan!!

And want to hear something really crazy? If you bought today instead of April 2008…when the federal tax credit began, you’d save more than $120,000 over the life of the loan!! That’s because in April 2008, the 30-year fixed sat at 5.92 with 0.4 points!! (Which everyone thought was VERY good at the time.)

Feel free to plug your own numbers into this loan calculator to see how today’s numbers work out for you. (Just be sure to compare your actual numbers to the April 2010 30-Year Fixed average of 4.74% with 0.7 points). And while these savings are not actually a “tax credit”, the money you keep is in real, honest to goodness greenbacks!

So why is everybody still so focused on the measly $8,000 Tax Credit?

Being Impatient And “Sticking It To The Man”

I think that for starters, it’s $8,000 tax credit that can be earned in a single year, instead of getting it in annual cost savings. You would actually have to live in the house 8 years to save $8,000 in our example above. Let’s face it…we can sometimes be pretty impatient. And since most people don’t live in the house for the entire 30 years of the loan, $28K is probably a bit overstated. But for the average person who stays in their home 8-10 years, the savings lost in the elimination of the tax credit have already been replaced by interest rate savings!

And I think that there is something about getting money from the IRS that causes people to act. People like to stick it to the man! Feeling like you’re saving more on your taxes, makes us feel smart…like we pulled a fast one.

But this is not the kind of market to be swayed by clever marketing incentives…even $8,000 ones coming directly from Uncle Sam. This is the kind of market to step back, look at the real numbers, and make an educated decision.

As always, consumer confidence drives the housing market…not incentives. And that means the economy and job market need to get on track. But if you’re thinking about buying a home, today’s interest rate environment presents an amazing opportunity! With buyers in firm control of the market in most areas, and interest rates at all time lows, there probably won’t be another buying environment like this again (at least not in your lifetime…or mine, for that matter).

For additional information on buying or selling in today’s market environment, contact Hal Benz -Your Home Sale & Short Sale Specialist. 908-216-4836

Tags: Home Buyer Tax Credit

Why Houses Aren’t Selling.

Despite what you see in the national media, houses in our market ARE selling. Seriously! I know of 2 local homes that went under contract last week at or above list price. Bother were on the market less than 3 days. And get this…one of them was not being actively shown because the homeowner was in the hospital. The offers were made sight unseen!!

In The Market, Out Of The Market, And No Man’s Land

Today’s housing market is fundamentally no different than any other. It’s just that there are fewer houses now that are truly “in the market”…meaning that buyers are seriously considering buying them. It’s all about a home’s price and condition.

Jap Papasan, best selling real estate author and VP at Keller Williams Realty put this short video together to go over the key issues. As always, Jay nails it. Check it out…

For information on how to properly price your home, contact Hal Benz -Westfield NJ’s Home Sale & Short Sale Specialist. 908-216-4836

Tags: Home Sales, Jay Papasan, marketing

Building Permits Part 2: The High Cost Of Doing It Wrong

In Part 1 of “Building Permits”, we reviewed when you might and might not need a building permit for a home improvement project. We learned that failing to obtain the proper building permits can complicate a real estate deal down the line, and can potentially cost the seller a lot of money. But who should be responsible for pulling the permit? And when you’re buying or selling a home, who should check?

Whoever Pulls The Building Permit Takes Responsibility

In most of the country, a homeowner can legally do most home improvement projects on their own (check in your local area). According to Jan Burchett, Executive Director of the National Association of the Remodeling Industry, it’s a good idea to have your contractor pull the building permit. While you might need to pay a little more for their time to do this, it’s worth it. “In most jurisdictions” says Burchette “the person obtaining the permit is considered to be the contractor and therefore the one liable if the work does not comply with building code.”  

Translation: If the job was done wrong, the homeowner will  be held responsible for correcting the problem…NOT the contractor! How many homeowners are prepared to take this on?

And here’s something I bet you didn’t know: If a home renovation project is done without the required building permits, you may inadvertantly VOID coverage for claims under your homeowner’s insurance policy. This issue alone makes the cost of the permit look more appealing, don’ you think?

So when you’re buying a home, how can you tell if the proper permits are in place?

One way to check this out is to review the Seller’s Disclosure Form. It asks whether the proper permits were obtained for a variety of jobs. If the homeowner answers “no”, then be careful. I’m NOT suggesting that the workmanship will always be poor and there is a safety risk.  But I AM saying is that without having an inspector come and check it out, you won’t know for sure. And we already know how complicated and costly that can be!

Another way is to check the home’s Property Card. The local building department maintains a record of permits obtained on every property in town. It is often referred to the “property card” for the home.

One of the most important tasks that a real estate agent can provide (and unfortunately, one that most fail to do) is to get a copy of it for their client. It’s a public record, and is available to anyone. (Here is a copy of a property card that I pulled for a buyer client last week. The identifying information was blacked out, since this is still an active contract)

By reviewing this card, you’ll see which jobs had permits pulled, and which ones didn’t. I can’t tell you how many times I find finished basements or additional bathrooms in a home that the town has no record of. Not only does this raise a safety concern, it also means that when the town catches on, the assessed value of the home could increase…sometimes significantly. And that means the property taxes will too!!

You should also find out if all open permits are CLOSED. I once represented a buyer in a sale where the contractor got all the permits, but never had the inspector come out to sign off that the job was finished.  The job was a large addition, and when the homeowner found out that the permits were still open (10 year later) the builder was out of business!! In the end, the homeowner had to escrow $60,000 at closing until everything could be resolved. What a mess!!

So to me, the takeaway here is simple: Don’t do a home renovation project without getting the required permits. And if they’re not in place, take care of the issue BEFORE the house goes on the market. Believe me, you’ll be glad you did!!

Tags: building permit, Home Improvements, property card

Building Permits Part 1: What To Know When Buying Or Selling A Home

Building permits are one of the most overlooked parts of many home improvement projects. Why? Because many homeowners don’t know when they’re needed, and some contractors don’t want to deal with them.  But when it comes time to buy or sell a home, the issue WILL come up. And when it does, hang on. It can be a rocky (and expensive) ride!!

When And Why Are Building Permits Needed?

Building permits are required to ensure that construction is safe and meets standard building code. But the problem is that there is never a single code that needs to be met. There are often national, regional and even local codes…which makes sense. Buildings in an earthquake prone region would have different requirements than those that are not, right? But the inspection process can slow things down. Towns often have a limited number of inspectors to do handle the workload. This causes contractors to slow down, which drives costs up. Sometimes, a shady contractor will offer a “discount price” if the homeowner agrees to do the job without permits. (This is a major red flag. RUN…don’t walk…to a more reputable professional).

For the “do-it-yourself crowd”, the best advice is to call your local building office before starting any job you’re not sure about. You probably need a permit if you plan to do something major like:

• Change the footprint of your home,
• Move a load bearing wall,
• Change the roof line,
• Add electrical wiring,
• Open the wall to add a door or window,
• Add or move a fixture that requires venting to the outside – like a sink, toilet or gas burning appliance.

You probably don’t need a permit if you’re doing something small like:

• Replace a faucet,
• Replace floor covering,
• Change countertops,
• Replace doors or windows without altering the structure.

But remember – everything about real estate is local…including the permit process. I needed to get a permit to have a security system installed in my Westfield home. Don’t assume that you know…call the town and find out for sure.

If you are trying to buy or sell a home that has not obtained the required permits for renovation work, expect the transaction to become complicated. Typically, the buyer will want an inspector to come out after the fact, and certify that the work was done properly. This often requires walls to be opened up, and fixtures to be removed. It can be a costly and time consuming process…paid for in most cases by the seller.

A seller can refuse to participate and attempt to sell the home “as-is”. But if the failure to obtain permits was not properly disclosed prior to the negotiation of the contract, the seller should expect the buyer to re-negotiate the price…or terminate the contract. If the buyer decides to walk away, the sellers find themselves in the unenviable position of having to disclose the lack of permits to all future buyers. This is NOT good for your marketing plan!

In Part 2 of this series, I’ll review some of the risks associated with not properly resolving permit issues, as well as a simple way for both buyers and sellers to protect themselves.

Tags: building permit, Home Improvements

Why People Hate Realtors.

Realtors have an image problem. Whether we like it or not, most people dislike us! In fact, a recent Harris Poll shows that Realtors are held in lower regard than farmers, actors, union leaders…pretty much everybody. At best we’re seen as a “necessary evil”. We’re the gatekeeper to the thing that consumers really want…the sale or purchase of their new home.

When I first got into this profession, this fact really bothered me. Within the industry, it’s caused many to call for a “raising of the professional standards bar“. And while that’s a discussion for another day, today I saw yet another example of why this negative attitude about Realtors exists…and probably will for many years to come.  And I blame the big name/ old school brokerage companies.

Selling Your Soul For $50

Last week, I was scheduled to meet the structural and termite inspectors at a home for a current buyer. Unfortunately, the listing agent lost the keys to the place which required the owner to return home (after 1 1/2 hours) to let everyone in. But by that time, one of the inspectors left, which required a return visit at the cost of an additional $50. My client (who arrived 30 minutes early) asked the listing broker to pay the additional $50 for the return visit. He refused.

Keep in mind that this was a BIG NAME broker in our market…a name that would roll off the tongue QUICKLY if I asked you to name a local broker. (In fact, if I gave you the agents last name, most folks in our local market would know it. So I won’t.)

And here’s how our conversation went:

• [Me] The inspector won’t release the report to our client until it is paid for. My client already paid for this inspection, but needs to pay again because we couldn’t get in the first time. He’d like you and your company to cover this so we can move forward.
• [Him] That’s not going to happen. I’m not in the position to approve an expense like this, and I wouldn’t do it anyway. $50 isn’t a big deal…so why is your buyer making it into one?
• [Me] Well it’s an additional $50 that he needs to spend because you lost your sellers keys. And your client wants to close quickly, so who can approve this?
• [Him] Nobody. It’s just not going to happen!
• [Me] Wow…OK. I guess you can run your business whatever way you want. But sometimes, you just need to do the right thing. Never mind…I’ll take care of it.

So I called the inspection company, gave them my credit card, and got a copy of the inspection report within 15 minutes. Problem solved.

When The Broker’s Need Comes First

So why would I write this post? I’m not going to name the other agent or company, and I’m certainly not looking for someone to give me a cookie for doing the right thing. It was only $50…hardly a “game changer”. But that’s the point!

The real estate industry is full of disempowered agents…sent by their brokers to represent them…until they make a mistake. Then, they’re suddenly “unauthorized” to make things right for their clients…especially if it costs the broker money.  And I think that’s just the way some of the big companies like it!

Believe me…I know this first-hand. I spend nearly 4 years managing for one of the big name/ old school brokers. I remember getting calls from agents at the closing table looking to authorize what seemed like a legitimate expense so that some sticking point could be resolved and everyone could go home. After being chastised one day for authorizing just such an expense, I remember being told ”the buyers and sellers have too much at stake to let their deal die for $X. Don’t let your agents give in. Don’t let them back down.” Wow… Really??

And so “we’re not authorized to approve this expense” became the mantra in the office. In fact, it’s still the mantra in most offices in most of the big name companies. I deal with it day after day after day.

It’s one of the reasons I left managing for the big name, and joined my current company. My current company ”authorizes me make my own decisions”…and trusts me to do the right thing. My current company believes that when I do the right thing for my client, I’m doing right by their brand name. What a concept!

But what worries me most for our industry is that the big, old school brands will continue to send their “unauthorized agents” out to do their bidding. They will continue to coach their agents to not back down, and not give in…even when they screw up. The perception of Realtors will continue to rank at the bottom of the public opinion polls.

And life will continue to be that much harder for the rest of us.

Tags: Harris Poll, Public Perception, Realtors

Buying Your Westfield Home: The Cost Of Renovation

When I’m working with buyers looking for a home in Westfield (or any town with traditional older homes) it’s common to discuss a big decision: Should they buy a more expensive home that is “turn-key ready”, or buy cheaper and then do the renovation themselves?

I had the opportunity to spend some time this weekend with some Westfield buyers facing just that dilemma. Fortunately, they had the resources to do either one. So how should a buyer approach this decision?

Calculating The Renovation Cost and The Time Value Of Money.

It’s important to begin this discussion by acknowledging that there are a LOT of factors that come into play when selecting the perfect home. Location… including the quality of the neighborhood, schools and commuting distance to work are among the most important. This post assumes that everything else is equal, and that the buyer is deciding whether to buy a more expensive ”turn- key ready” home in the neighborhood, or one that needs major upgrading. It also assumes that the buyer has the finances and resources to do this without relying on some crazy exotic mortgage product to do it.

If you read this blog frequently, you know how I feel about people getting over extended!

In order for my buyers to consider the older Westfield home, they would want to do these 2 common home renovation projects: 1) a two-story addition, 2) a major kitchen remodel. According to Remodeling Magazine’s 2009/10 Cost vs. Value Report, the cost of these jobs done at the “mid-range project level” in the NY metro area is as follows:

1. Two-story Addition – $201,780
2. Major Kitchen Remodel – $69,069

The total for this work is $270,849 …hardly small change! But if they could save enough on the purchase of the older Westfield home, it might be worth it, right? Maybe.

Let’s assume for a moment that since we’re EXCELLENT negotiators (smile) we were able to get the older home for a full $350K LESS than the renovated home in the same Westfield neighborhood. Looking at these numbers, the cost of the renovation seems to pay for itself, right? Maybe…and maybe not. Here’s why:

It’s all about LEVERAGE

Real estate is one of the most leveraged purchases you can make. That is…most buyers use very little of their own money to secure the deal. They put up a down payment (we’ll assume 20% for this post), and use the bank’s money to leverage the rest.

And leverage can be very helpful when paying for home renovation.

According to Bankrate.com at the time of this writing, a 30-year fixed mortgage is going for 4.59%/ year. And according to their mortgage calculator, if you were to finance the full $350K for the “already renovated home”, it would cost you an additional $1792/month for the principal and interest.

If you started the remodeling of the older home on the day you moved in, how long do you think it would take to complete? Let’s say it took 1 full year. According to the numbers above, you’ll need to pull $270,849 out of your personal investments within 1 year to pay the contractor. The fully remodeled home would have only cost you an additional $21,504 over that same year ($1792 x 12 months).

In fact, at $1792/ month it would take 151 months… 12 years and 7 months…before you spend the $270K you forked over in year 1 of the remodel.

A buyer needs to consider how long they’re planning on staying in this house. The average American moves every 7- 10 years (although I’m beginning to see these numbers increase in our area). So in this example, if you financed the renovation and planned to move before year 12, you came out ahead (at least on the ledger).

The good news for the re-modeler is that you get to make the home your own. You can do the job the way YOU want to. But the bad news is that you have to tie up a lot of money to do it. A lot of your “liquid assets” will be converted into home equity… a very “illiquid” asset at best.

By leveraging these remodeling  jobs your money could be used in other ways during this time (college costs come to mind).

Now I know that there will be those who criticize this post saying “hey… he’s in a commission based sales business. Of course he’ll advocate for the more expensive house!” That’s a fair criticism. And my builder friends…many who are already struggling in this economy… might be really angry after reading this!  I hope not.

My purpose here is not to advocate one option over the other. It IS to encourage people to think past the dollar figures and think of renovation costs in terms of “money spent” vs. “money leveraged”.

Deciding which option is best for you depends on your specific situation.

Westfield NJ Homes For Sale – Life After Tax Credit

Did you hear the sound? You know…the “thud” that occurred in May, and then echoed throughout June?  It was the sound of the local housing market falling on its face as the home buyer’s tax credits expired. But for those who had Westfield NJ homes for sale, the market remained stable. Well…only for those that were priced properly!

Westfield NJ Homes For Sale: It’s STILL All About Price!

As an active real estate broker, I had my concerns that the home buyer’s incentive could be creating a “bubble” in the local housing market. Many in the industry worried that the credit might not actually stimulate as many new buyers as hoped, but rather move the existing buyers into an earlier buying decision. If that was the case, then buying activity could exceed recent trends prior to the phasing out of the credit, and then drop off dramatically afterward.

So what actually happened?

The charts below show the homes placed under contract from January through June. The first is Union County, and the second is Westfield, NJ. Pay close attention to the yellow line in both graphs (which represents 2010). Notice how pending sales exceeds 2008 & 2009 in through the spring. But when the Home Buyer Tax Credit expired on April 30th? Ouch!

The Westfield market took a while to get going this spring (again, the yellow line), but by March, it exceeded both 2008 & 2009 in terms of pending sales. But the elimination of the buyer incentive was felt here as well, as pending sales fell below previous levels in May & June.

So what does PRICE have to do with anything?

As I mentioned in a previous post, homes that come to market priced properly (with the original list price within 5% of the final sale price) sell faster, and for a higher percentage of their original last price. So which homes went under contract AFTER the tax credit expired? Those that were priced properly!

Take a look at these two graphics. They represent the 22 Westfield listings that went under contract AFTER April 30th AND closed by the time of this posting. The first chart shows the homes that came to market priced RIGHT (original price within 5% of the final sale price). The average return was a whopping 99.39%. For those who priced too high out of the gate, the return was only 85.7%

And what about time on market? Those that were right priced sold in an average of 15 days. And those that came on too high and needed to have a price adjustment? The average here was 98 days on market.

So what is the take away here?

At first blush, it looks like the home buyer tax credit DID move buyers into an earlier decision, rather than stimulate additional buying activity. (We’ll need a few more months of data to know for sure.) But if this IS the case, then the pool of available buyers could be smaller than usual in the upcoming months.

Sellers MUST understand that PRICE is critical. This is NOT the time to “test the market” with an inflated price. Buyers know value when they see it.  As this data proves once again, if you come to market with no more than a 5% cushion for negotiation, you’ll sell faster and retain your price. If you ask for too much, the market will wait for you to get it right.

And if the buyer pool is smaller for the remainder of the year, you could be waiting a LONG time!

Tags: Westfield NJ Homes For Sale

Why I Became A Short Sale Specialist.

Despite signs that the economy continues to grow (albeit slowly), foreclosures continue to rise in New Jersey. In fact, right here in Union County, foreclosure notice have nearly doubled over the past 3 months.  I think we can all agree that this is a very troubling statistic. The current US housing market and financial crisis has caused enormous stress and heartache throughout our area. And the end result is that some very good people…maybe people you know… are facing the very real possibility of losing their home.

Maybe it’s my social work background, but I just couldn’t feel good about being a real estate broker without doing what I could to help. That’s why I took the time to earn the Certified Distressed Property Expert (CDPE) designation, and why I’m focusing an increasing part of my efforts reaching out to distressed homeowners.

Foreclosure Avoidance IS Often Possible.

What many people fail to recognize is that in many instances, foreclosure avoidance IS possible. But it requires 3 things:

1. Put Your Ego Away.
   • The biggest reason why people lose their house through foreclosure us that they bury their heads in the sand. Embarrassment is a major reason for this… I get that. Many decent, smart and hard working people can get foreclosed due to hardships beyond their control. But time is not your friend when facing foreclosure. The sooner you can get put your ego in check, the better.
2. Reach Out For Professional Help.
   • The fact remains that nearly 70% of all foreclosures nationally occur without any visible intervention from a real estate professional. It doesn’t have to be that way. As one of the very few agents in our market with specialized training to handle distressed properties, I know the proper resources to get you help! Sometimes, the most important first call is to your lender. If you qualify for a mortgage modification, they would MUCH prefer it over a foreclosure. Lenders report that on average, the foreclosure of a $200,000 home can cost them between $70,000 -$100,000.
   • Sometimes, a foreclosure avoidance counselor is the right person to call. They have the training and knowledge to help you explore your best options.
   • Whichever is best for you, feel free to give me a call and I’ll point you in the right direction.
3. Be PERSISTENT.
   • This may be the hardest part. Emotions run high, and these systems move slowly. Be persistent. Keep a record of your interactions with the date, time and name of the contact person you talk to at EVERY STEP along the way. I promise…you’ll need to reference it at some point in the future.

The goal of every Certified Distressed Property Expert is to help keep people in their homes. But sometimes, selling the home and avoiding foreclosure is the best option. Too frequently, people are afraid that because they owe more than their home is currently worth, there is nothing they can do. NOTHING could be farther from the truth!

A properly executed Short Sale (selling for less than is owed and having the bank absorb the loss) can be one of the best ways to avoid foreclosure. But they are difficult and time consuming. They are a part of this business that most agents avoid like the plague. Unless you really know what you’re doing, it’s virtually impossible to have success.

As an experienced real estate broker, I have SIGNIFICANT experience in this area. And now as a Certified Distressed Property Expert, I have even more knowledge and expertise to help you achieve the best possible outcome.

So if you or someone you know is worried about losing your home, give me a call. Together we can start to explore solutions!

Tags: Avoiding Foreclosure, Distressed Property

Rent With Option To Buy In NJ? Here’s How.

Increasingly, I have clients that want to rent with an option to buy. In my part of NJ, some buyers are still very cautious about the housing market. For them, paying rent for a year and reserving the option to buy at a later date makes them feel more comfortable. And for some, it probably makes a lot of sense. But it needs to be done properly, and most people don’t really understand what has to be done. So let’s go over it.

Rent With An Option To Buy: How It Works In NJ

In order to rent and reserve the chance to buy the property in the future, it’s important to understand that you need to create two separate contracts. That’s right…TWO. The lease is one contract, and the option is the second contract. The option legally binds the owner to sell the property to the buyer at some point in the future, but it does NOT bind the buyer to the purchase. Hence the name “option”.

You should remember that a NJ real estate agent is only allowed to “fill in the blanks” on a pre-approved contract, we can’t draft our own. Otherwise, we’d be practicing law without a license which is a big no-no. And since an option is a type of contract? You guessed it! You’ll need an attorney to do draft it.

A few basic things need to go into the option contract:

1. When will the sale take place?
   • Usually, the date is set at the conclusion of the lease period. However, a different sale date can be negotiated.
2. What will the sale price be?
   • This MUST be established up front. You can agree to a specific dollar amount, or you can agree to accept the opinion of a licensed appraiser at the time the option is executed. But it won’t be legally binding without establishing SOME purchase price on the front end.
3. What will the terms of the sale be?
   • These would be the same as in any other purchase. How long does the buyer have to get a mortgage? Can they still live in the house during this period? Be sure to deal with an experienced real estate attorney who will know what to include here.
4. Will any portion of the rent count as money towards the purchase?
   • Unless you agree to pay rent in excess of the going market rate, I usually don’t see landlord/sellers agreeing to this. But under the right set of circumstances, they might.
5. What will you pay for the privilege?
   • And this is KEY. You can’t legally bind the seller to this contract of sale without paying something for the privileged. The buyer needs to pay the seller at the time the option is created. How much? Everything is negotiable. I typically see fees of about 5% – 10% of the overall purchase price. In some instances, I’ve seen them set for significantly less. This fee is usually credited towards the purchase price. But unless the buyer pays the seller a fee (known as consideration) UP FRONT, you don’t have a legally binding agreement.

OK…so you’ve established an option. The lease comes to it’s conclusion, and it’s time to decide. Do you want the place? If so, you exercise the agreement and buy it as per the terms established. But what happens if you don’t want to buy?

Well, you move on with your life. BUT THE SELLER KEEPS YOUR FEE. That’s correct…the 5% – 10% that you gave up front is kept by the seller. REMEMBER…what you bought for that fee was the RIGHT to purchase. And the seller was legally bound to make it happen. If you decide not to buy, that’s your decision. But you had the right…heck, you paid for the right. You simply decided not to do it.

It’s the last paragraph that often stops people from trying to rent with an option to buy. You really need to think this through. But for some, it IS the right thing to do. Just be sure that you’re working with an agent and attorney who has experience in putting these kind of deals together. If you do it incorrectly, you could end up disappointed. And as always, don’t hesitate to call me if you have any questions.

Tags: Option Contract, Rent-To-Own