Since the housing crisis started I have been mystified that no real estate professional has stepped forward with several of the more obvious solutions to this crisis. Since I am not aware of any professional that has set forth a win-win program. I have decided to set forth mine. Everyone is a winner in my program. There are no losers.
Under our foreclosure system, everything begins when the homeowner falls 90 days behind in his mortgage payments. It is at this point that the foreclosure system kicks in. History has proved that it is very rare for any homeowner to save his home once he falls 90 days behind in his payments.
Under the system that I propose, the lender at this point instead of starting foreclosure proceedings, would send his agent to the residence with two legal documents. These two legal documents would be a Deed In Lieu of foreclosure and a Lease-Option contract. Or more specifically a negotiable five- year lease with an option to purchase. As I will explain, the negotiable feature is very important.
Let us now examine how these two rather simple legal documents would solve both the problems of the lender and the homeowner.
In today's real estate market, foreclosing on a home is akin to lenders suicide. First, it must pay for the far from cheap attorney and other foreclosure fees. When it takes possession of the home, it is common for it to discover that either the departing owner or crack heads and vandals have trashed the home. Often to the tune of $20,000-$30,000 or more.
When a property owner signs a Deed In Lieu of foreclosure, all of these crushing lender foreclosure expenses are short-circuited. This document is the voluntary transfer of the owners title in the property in return for the promise of the lender not to engage in foreclosure proceedings against the homeowner.
The question now becomes why would an owner agree to such a thing? There is of course some benefit to the owner in signing a Deed In Lieu of foreclosure document. His credit rating will not be as badly damaged and the lender cannot come after him for losses it suffers on the property. The answer however, is that the real benefit to the homeowner is the other legal document in the briefcase of the agent, a negotiable five- year lease option contract.
These are the contract terms. For an option premium of $200, the lender who now owns the home will rent it to the ex-owner, who is now the tenant for a period of five years at a rent equal to 31%-33% of the tenants verified gross monthly income. It really does not matter which number is used. History has proved that in this range the tenant will be able to handle the rent. At any time during or at the end of the five year rental lease the tenant will have the option but not the obligation to purchase the property from the lender at the original sale price. The homeowner has an additional inducement to agree to all of this.
The option has an important additional selling point. It is negotiable. What this means is that any time in the five-year option period the option holder can sell the option to any interested buyer for whatever price it can command. You will recall that the premium to purchase the the option was $200. Over the five-year option period, home values may be expected to recover to the extent that the tenant may be able to sell his option for thousands of dollars to a stronger purchaser. Or his situation may improve to the point where he can exercise the option and purchase the property back at the original sale price. Frankly, the $200 option premium amount is totally arbitrary but I think it is critical for both the homeowner and future potential buyers to know that the option has value. In the absence of some such fee human nature being what it is I feel that it might be difficult to establish in peoples minds that the option contract has true value.
As you can see, there are powerful inducements for both the lender and the homeowner to agree to the solution I have outlined. Most importantly, it is a win-win scenario. There are no losers,only winners.
The only thing I can not figure out is why a real estate professional has not been able to get a workable solution such as this out to the general public before now.
Under our foreclosure system, everything begins when the homeowner falls 90 days behind in his mortgage payments. It is at this point that the foreclosure system kicks in. History has proved that it is very rare for any homeowner to save his home once he falls 90 days behind in his payments.
Under the system that I propose, the lender at this point instead of starting foreclosure proceedings, would send his agent to the residence with two legal documents. These two legal documents would be a Deed In Lieu of foreclosure and a Lease-Option contract. Or more specifically a negotiable five- year lease with an option to purchase. As I will explain, the negotiable feature is very important.
Let us now examine how these two rather simple legal documents would solve both the problems of the lender and the homeowner.
In today's real estate market, foreclosing on a home is akin to lenders suicide. First, it must pay for the far from cheap attorney and other foreclosure fees. When it takes possession of the home, it is common for it to discover that either the departing owner or crack heads and vandals have trashed the home. Often to the tune of $20,000-$30,000 or more.
When a property owner signs a Deed In Lieu of foreclosure, all of these crushing lender foreclosure expenses are short-circuited. This document is the voluntary transfer of the owners title in the property in return for the promise of the lender not to engage in foreclosure proceedings against the homeowner.
The question now becomes why would an owner agree to such a thing? There is of course some benefit to the owner in signing a Deed In Lieu of foreclosure document. His credit rating will not be as badly damaged and the lender cannot come after him for losses it suffers on the property. The answer however, is that the real benefit to the homeowner is the other legal document in the briefcase of the agent, a negotiable five- year lease option contract.
These are the contract terms. For an option premium of $200, the lender who now owns the home will rent it to the ex-owner, who is now the tenant for a period of five years at a rent equal to 31%-33% of the tenants verified gross monthly income. It really does not matter which number is used. History has proved that in this range the tenant will be able to handle the rent. At any time during or at the end of the five year rental lease the tenant will have the option but not the obligation to purchase the property from the lender at the original sale price. The homeowner has an additional inducement to agree to all of this.
The option has an important additional selling point. It is negotiable. What this means is that any time in the five-year option period the option holder can sell the option to any interested buyer for whatever price it can command. You will recall that the premium to purchase the the option was $200. Over the five-year option period, home values may be expected to recover to the extent that the tenant may be able to sell his option for thousands of dollars to a stronger purchaser. Or his situation may improve to the point where he can exercise the option and purchase the property back at the original sale price. Frankly, the $200 option premium amount is totally arbitrary but I think it is critical for both the homeowner and future potential buyers to know that the option has value. In the absence of some such fee human nature being what it is I feel that it might be difficult to establish in peoples minds that the option contract has true value.
As you can see, there are powerful inducements for both the lender and the homeowner to agree to the solution I have outlined. Most importantly, it is a win-win scenario. There are no losers,only winners.
The only thing I can not figure out is why a real estate professional has not been able to get a workable solution such as this out to the general public before now.
3 comments:
after forty years as a speculator, can tell me what penny stock you buy recently,thanks
I believe this is the perfect solution to the foreclosure mess. I had just drafted a very similar argument and decided (before I posted it) to see if the idea was already out there. Kudos to you!
Surgite!
IT must be true what they say about great minds thinking alike.
What is strange about this is that a solution along the lines I suggested is obvious.
Go figure!
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