Watch Out for Lease Option Land Mines

Lease-Options and Seller Financing have become more and more prevalent in Salt Lake City since the market downturn.  In the right hands and under the right conditions, unconventional real estate transactions can save the day for both buyers and sellers.

Oliver Frascona, Esq. I attended a fantastic course led by real estate attorney Oliver Frascona, Esq.  He revealed several hidden land-mines inherent in using Lease Option Contracts (one of which cost me $32,000 in attorney’s fees in 2009). 

Lease option contracts are not bad.  But in many cases, it may be better to have an attorney draft an All Inclusive Deed of Trust Contract (a.k.a The Wrap). Wrap contracts may have less risk, and may provide greater tax benefits to the buyer.

You’ll find that many real estate agents and title companies in Utah are weary of these types of contracts because of the Due on Sale or Transfer Clause included in most mortgages.  Essentially, the Due on Sale clause gives the owner of the loan the right to call the entire balance due and payable if the Deed is transferred to a third-party that’s not a signer on the loan. But the key concept here is the lender has the “right”, it does not mean that they will exercise that right.

Considering the problems that most banks are facing today, one would assume that last thing they want is to take ownership of yet another home; assuming all mortgage payments, taxes and insurance are current.

If a homeowner gets backed-up against a wall and can’t afford to make another payment, a lease-option or wrap transaction may be the best alternative.  It keeps the home out of foreclosure, reduces stress on the neighborhood and gives someone else a shot at home ownership.

I’m ending this post with a CMA disclosure: I’m not an attorney and I’m not licensed to provide legal advice in the State of Utah.  Utah REALTORS have the authority to execute State approved Short Sale Contracts, but the All Inclusive Deed of Trust contracts must be drafted by an attorney. In my opinion, the protection and benefits afforded by the wrap contract is worth the extra $350 legal fee and far out-way the risk of the Due on Sale or Transfer clause.

Want more details and a referral to a good real estate attorney?  Send me an email:  md@michaeldruce.com.  I’ll hook you up.

How do you turn an ordinarily calm person into an emotional wreck? 

Beyond ReasonPresent them with a difficult decision; that involves lots of money; that affects their quality of life; that’s really difficult to undo.  In other words, buying and selling a home can unravel just about anyone.

One of my favorite courses at this years NAR was led by Daniel Shapiro, Director of the Harvard Negotiation Project.  He highlighted the five core emotional concerns that impact nearly every negotiation.  Through more than ten years of research they’ve learned that Appreciation, Autonomy, Affiliation, Status and Role effect every negotiation.  The key of course, is to fully understand the effects that these powerful emotional concerns have on the negotiation, and to use them to create trust and acceptance from the other party.

Of the five core emotions, the most universal tool in the tool-box is Appreciation.  If people feel misunderstood, devalued or unheard, you’re less likely to succeed in influencing the other party to your cause.  The second is Autonomy.  If people feel as if they have lost their freedom to make decisions without imposition, they begin to listen and cooperate less.

It’s surprising how much technology has changed the negotiating process in real estate.  It’s difficult to address a buyer or seller’s emotional concerns when most of your communication is by fax, email and phone.  The best agents understand the importance of communication, listening and building relationships.  They start by dealing with the emotional concerns of the other REALTOR.  If they can establish trust with them, they might open-up and reveal the true emotions and needs of their clients.

My favorite take-a-way from Mr. Shapiro:  “We have all been negotiating since we learned to cry for our milk.  Unfortunately, some people have not changed their strategy since”.

Luxury markets are defined as the top 10% of homes in any given market, measured by price, but never less than $500,000. 

There’s currently a 30-month inventory of homes priced over $1,000,000 in the Salt Lake City area. Total transactions are off by 25% from a year ago. This is shaping up to be one of the weakest categories of real estate in 2010.

This year at the NAR Convention, I attended two great courses led by Laurie Moore, Director of the Institute of Luxury Home Marketing.  The overriding theme:  Now, more than ever, luxury sellers are in need of agents that are entrepreneurial problems solvers and great marketers. 

Luxury Market Trends:

• Mortgage defaults on Jumbo Loans (loans over $750,000) are now twice the rate of Conventional Loans.  This means a growing inventory of short sales and foreclosures of luxury properties.
   
• Attitudes and motivations are shifting away from conspicuous consumption, to comfortable and peaceful luxury.
   
• Design esthetics are shifting as younger buyers enter the category.  A low carbon foot-print is growing in importance.
   
• All-cash bargain hunters are on the move.

My favorite take-a-way from the panel of experts is a strategy called Romancing the Home.  It’s based on the premise that every home has a story to tell that is unique.  The best marketers are telling stories that are compelling, visual and emotional.  The more detail, the better.

The average price spread between the list price and sold price in the last 60-days was approximately 4%. With 54% of the transactions closed at or above the listing price, this clearly indicates that the distressed home sellers and lenders are setting their list price with little or no-room for negotiation.

Here are some very important questions you should ask before you decide to chase a short-sale listing:List Price: $455,000 Sold Price: $455,000 Sold: 7/22/2009

Has the bank approved the short-sale listing price?
If not, the list price means nothing.  It’s nothing more than a hopeful price set by a distressed homeowner and a listing agent.  Some inexperienced agents will use an unreasonably low listing price to lure homebuyers to the listing.  This type of listing is a waste of everyone’s time.  You can generally weed them out with a quick analysis of the 30-60-90 day comparables.  If the list price is 30% below the lowest comps in the neighborhood, and the price has not been pre-approved by the lender, there is a very slim chance that the bank will give your offer the time of day.

What was the net transaction value of the most recent sales of like properties within the neighborhood (comparables)?  What’s the average price per square foot? How long were they on the market?
The lender will most likely order a BPO (broker price opinion) in place of a professional appraisal.  The BPO will be based on the same criteria that you’ll be using.  The bank will make pricing determinations based on the comps.  The lender will generally set a price that is at the low-end or below market comps.  Offers will be reviewed within a pre-defined framework that varies by loan type and lender.

Has the homeowner submitted a complete short-sale package to the bank?  Has the bank confirmed receipt of the package and its completeness? 
The short-sale package should be complete and thorough so the lender doesn’t have to spend any time chasing down documents and facts.  If they do, the file could easily end up in the bottom of the pile.  An incomplete package can hold-up the offer review process for weeks.

What price did the seller pay for the home?  How much does the seller owe on the first mortgage?
These answers will give you a clear idea of the spread between the short-sale price and the previous market value of the property.  Your real estate agent can easily look-up historical transactions that were listed on the MLS.  Mortgage balances are more difficult to come by.  If the seller will not disclose the mortgage data, you can get a pretty good idea of what the principle balance of the loan is by researching the deed of trust through public records.

In general, I like to make a practice of researching the deed before writing an offer.  It will eliminate many of the surprises that most buyers learn long-after they get attached to the home.

Promontory Park City, Utah

• Four out of five Utah home builders that were around in 2003 have closed their doors.
  
  
• Utah’s residential construction peaked in 2005 with 28,500 building permits.  By 2008 the number of permits had dropped by 61.2%.
  
  
• Eagle Mountain, Draper, Herriman and Saratoga Springs were the hardest hit areas, with a drop in building permits of more than 80%.
  
  
• The collapse of Utah’s housing bubble wiped out at least $20 billion in wealth and has eliminated more than 20,000 construction jobs.
  
  
• Newly built, unoccupied homes doubled from 2007 to 2008.  2,623 houses were sitting empty in Utah’s five biggest counties.
  
  
• Newly built houses increased in size by 27% and the lot sizes decreased by 20% from 2000 to 2007
  
  
• The 2008 Census estimated that 76.2% of all Utah households were home owners, the highest number in history.