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What Is a Real Estate Option Contract—and Do You Need One to Buy a House?

August 3, 2019

 

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Traditionally in real estate, when sellers put their home on the market, they can consider many buyers and sell to whomever they want. But when an option contract is introduced to the mix, that all changes—the buyer gets the exclusive right to buy the property but is not obligated to do so. Here’s how real estate option contracts work.

The basics of real estate option contracts

A real estate purchase option is a contract on a specific piece of real estate that allows the buyer the exclusive right to purchase the property.

Once a buyer has an option to buy a property, the seller cannot sell the property to anyone else. The buyer pays for the option to make this real estate purchase. The option usually includes a predetermined purchase price and is valid for a specified term such as six months to a year. However, the buyer does not have to buy the property, whereas the seller is obligated to sell to the buyer within the terms of the contract.

Options have to be bought at an agreed-upon price. If the buyer doesn’t buy within the time frame, the seller keeps the money used to buy the option.

Advantages for the buyer

A real estate purchase option can be great for buyers. For example, if you want to buy a lot of land to build a new home, a purchase option can be used to keep the lot available for a certain amount of time, until you have funding.

The landowner cannot sell the plot to anybody else during the term of the option. At the end of the term, the landowner must sell the land at the price agreed upon, even if property values have risen in the interim. However, some option contracts may include terms that put a cap on the property’s price, or include other factors to determine the final price.

Advantages for the investor

Investors can use real estate options to secure high-profit investments at relatively low risk.

Here’s an example: An investor notes that a specific plot of land is in a prime location for further development such as subdivisions or a shopping plaza. Instead of purchasing the land outright and then selling it to developers, the investor purchases exclusive rights to the land through an option.

With the option in place, he approaches investors and developers, offering them the land at a much higher price than his locked-in option purchase price. Once his higher offer is accepted, he either sells the option itself for the purchase price or purchases the land and then flips it to the developer, pocketing the difference.

Lease options and their risks

Tenants interested in buying a rental property can use a lease option, also known as a rent-to-own arrangement. A lease option can be tricky and technical, so it’s in your best interest to get a lawyer to go over it.

A lease option allows the renter to purchase the property after a predetermined rental period, which the buyer pays to obtain. The lease option could determine a purchase price or state the property will sell at market value. A portion of the rental payments—which will likely increase due to the addition of a new premium—can be applied to the future purchase. All of these terms will be in the lease option contract.

You will lose money on a lease option if you don’t buy the property. The owner can pocket the additional rent premium and rent option costs if you don’t buy. For this reason, you should carefully review and weigh your options. In addition to a lawyer, meet with a financial planner to make sure you will be able to buy the property before the term ends.

The post What Is a Real Estate Option Contract—and Do You Need One to Buy a House? appeared first on Real Estate News & Insights | realtor.com®.

How Do Unmarried Couples Divide Property After They Split Up?

September 25, 2018

Today, 14% of Americans aged 25 to 34 live with their significant other without getting married, and many of these unhitched couples are buying homes. Which begs the question: If this merry, modern-day union goes south, how do unmarried couples divide their assets after they split up?

When those more traditional duos, aka married couples, divorce and divvy up property, the process is fairly simple (at least in legal terms), since there are laws in place to protect all parties and clear-cut rules on what’s kosher‚ or not. But when you’re cohabiting without tying the knot, it’s a very different animal. Here’s what you need to know about buying (and possibly splitting) a home with a significant other when you two haven’t walked down the aisle.

How does dividing real estate assets differ for married and unmarried couples?

When married couples divorce, there are several options available to them in dividing any real estate they own. One spouse can buy the other out, they can opt for a delayed buyout, or they can sell the home and split the profit.

This decision is all mediated by divorce court, and, notably, the court can force the sale of the house if the (soon-to-be ex) couple can’t agree on what to do with it. This is so that if one party is desperate to sell (to, say, buy a home elsewhere) or buy the other party out (so that one of them can stay put as sole owner), the courts can make that happen.

With unmarried homeowners, however, the courts’ hands are tied: In most states, provided both unmarried partners have equal legal ownership—meaning both of their names are on the title to the property, no matter how much either party contributed to the purchase of the home—both must agree to sell the place before it’s put on the market.

“In a divorce case, the court will [force the sale of] the house—no problem,” explains David Matthews, a partner with Weinberg Wheeler Hudgins Gunn & Dial in Georgia. “With unmarried couples, you’d have a hard time. You could never force the other side to buy you out. If one party wants to be really obstinate and not sell, the other party has a problem.”

Plus, even if an unmarried partner does agree to a buyout of the other, the cost of doing so is more expensive than it would be for a married couple doing the same thing.

“Transfers of assets between the parties in a judgment of divorce are tax free,” says Lynne Strober, the co-chair of the Matrimonial and Family Law practice at Mandelbaum Salsburg in New Jersey. “This means that if one spouse transfers their interest in the property to the other party, there is no tax consequence. However, if there is a buyout between an unmarried couple, tax issues may arise, as the transfer may be a taxable event.”

This means unmarried couples should talk to an accountant about how much they’ll pay in taxes when transferring assets, so they aren’t blindsided by the costs.

What can unmarried couples do to protect themselves if they’re buying a house together?

Due to the legal complications noted above, numerous experts agree that unmarried couples (whether they are romantically involved or business partners) need to have an agreement in writing before they buy a home together. This is the only real way to protect yourself and make sure the property is divided fairly and without issue in the event of a breakup.

“When unmarried couples buy a home together, they can’t do it on a handshake,” says Matthews. “Because in almost every state, if you have an agreement regarding real estate, it has to be in writing. It doesn’t have to be a 40-page formal document drafted by a professional lawyer, just an agreement about how things are going to be divided.”

These contracts, sometimes known as “cohabitation agreements,” should cover these things at a minimum:

  • What to do with a home in the event of a breakup (sell it and split the proceeds, or allow one party to buy the other out)
  • The percentage of profits each party will receive upon sale
  • How to handle unanticipated disputes that may arise in the process of dividing the asset. “It’s very important to have to have an agreement about if you can’t reach an agreement: Who’s going to decide it?” says Peter M. Walzer, an attorney at Walzer Melcher in Los Angeles. “Just saying ‘We’ll go to court’ is a very expensive option, so you may want to agree to go to a mediator first.”

What happens if couples don’t have a cohabitation agreement?

If an unmarried couple buys a home without a written agreement in place and splits in a less than amicable fashion, they could be in for a lengthy and expensive legal battle if they can’t reach an agreement about the property on their own.

Both Matthews and Walzer agree that the legal fees associated with litigating issues of ownership or equity in the home would be likely to run to at least $25,000—and could tally up in the hundreds of thousands, often well above the value of the home itself.

“I’ll say this: It’s a whole lot cheaper to hire a lawyer to write up an agreement before you buy a house than it is to litigate it later on: A stitch in time saves nine,” says Matthews. “There’s no way to predict legal fees, but I don’t see any way you could even get the ball rolling for less than $25,000 to $50,000.”

Of course, bringing up the idea of a contract that’s specifically meant to protect you in the event of a breakup is a delicate matter. Experts say that many couples fail to get anything in writing because they are reluctant even to broach the subject. But it’s vital.

“When people get together like this, they don’t want to put it in writing, because it’s awkward. It’s hard on the relationship. It’s like getting someone to sign a prenup,” Matthews says. He feels, though, that it’s crucial that they take the time, put it in writing, and sign an agreement. “Preferably have it witnessed. Map out how things are going to be done, and who owns what.”

The post How Do Unmarried Couples Divide Property After They Split Up? appeared first on Real Estate News & Insights | realtor.com®.

What Is an Acceleration Clause? Find Out Now Before You Mess Up Your Mortgage

August 3, 2018

mortgage acceleration

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What is an acceleration clause? If you have a mortgage, odds are your contract includes an acceleration clause. It basically means that if you break any terms of your loan, your lender can demand “accelerated” payment. In other words, rather than paying that money back over 15 or 30 years as planned, the whole amount is due immediately.

Sound stressful? Here’s what home buyers and owners should know about a mortgage acceleration clause, including what triggers it and how to keep this scary scenario from happening.

What is an acceleration clause?

An acceleration clause is a part of the standard mortgage agreement used by Fannie Mae, a contract used in 80% to 90% of residential mortgages, explains Adam Sherwin of the Sherwin Law Firm, in Somerville, MA. And even if your mortgage is not backed by Fannie Mae, most lenders have some form of an acceleration clause in place.

If you adhere to your mortgage contract by paying your monthly bill on time and otherwise, you will avoid ever triggering this acceleration clause. But if you violate any of your contract’s terms, watch out.

“If any terms of the loan agreement are not met, the mortgage note holder has the right to call the note,” explains Ralph DiBugnara, a vice president at Residential Home Funding.

Translation: It’s time to pay up!

What can trigger an acceleration clause?

The most common reason lenders accelerate a mortgage is because a borrower has failed to make monthly mortgage payments. But most mortgages also allow acceleration if another part of the contract is breached. Other common covenants that could trigger acceleration include the following:

  • Not having home insurance—or not keeping it current
  • Not paying property taxes, or paying them late
  • Failing to keep the home in livable condition
  • Attempting to transfer the property without approval from the lender

 

Each mortgage contract is different, so make sure to read yours carefully to know what could trigger your acceleration clause.

The mortgage acceleration process

Generally a letter will arrive informing a borrower that the lender has triggered the acceleration clause. The letter will give the amount due, consisting of the balance of the loan, plus interest on any missed payments. This letter will also include the date by which you must pay up. Typically, that will be within 30 days of receiving the letter.

If you can’t pay, the lender will proceed to the next step: foreclosure, where the lender assumes ownership of your home in an attempt to recoup its costs.

A lender doesn’t have to accelerate your loan to foreclose on your home, explains Sherwin, but often it will. “It’s kind of a formality,” he explains. “It’s one last chance to pay before the foreclosure process begins.”

What can you do if your mortgage is accelerated?

“It’s important to note that even if your mortgage is accelerated, you can still avoid foreclosure,” says Sherwin. “It doesn’t mean that there’s no other option left.”

Usually, you can work with your lender to fix the problem and have your mortgage reinstated. That could mean paying the missed payments (with interest) or fixing whatever caused the lender to call the loan. Sometimes, your lender will also restructure your loan, called loan modification, making your payments smaller so that you can afford them.

“Each servicer has their own specific guidelines for modification,” says Sherwin, but they may extend your loan’s terms, reduce your interest rate, or come up with a delayed repayment schedule that works for both parties.

The post What Is an Acceleration Clause? Find Out Now Before You Mess Up Your Mortgage appeared first on Real Estate News & Insights | realtor.com®.