Thursday, May 5, 2016

Throwing Money Away...

Buy vs. rent a home: When renting isn’t “throwing money away”

Military personnel writes..

I have to move every 3-4 years for work, and so does everyone else I work with (military). A LOT of coworkers buy and sell a house at each duty station, because someone told them, “Since you never see rent money again, buying a house is usually the better financial decision.” And I’m here to tell you that’s BS when you’re buying a home for a short time (less than 4 years). Just like rent, there is a lot of money going out the door when you own a home that you’ll never see again.
Traditionally, owning a home is pitched as a good investment, because you build equity in the home by paying off the mortgage principal. True statement. But consider all the rest of the money you have to shell out along the way to do that:
  • Mortgage interest (this is usually the largest piece of the pie, especially early in the mortgage)
  • Property taxes
  • Home owner’s insurance (HOI)
  • Flood insurance
  • Mortgage insurance (if your downpayment was less than 20%)
  • Maintenance/repairs
  • Condo or HOA fees (for those types of communities)
  • Realtor/lawyer fees when selling (and sometimes buying)
  • Closing costs (buying and selling)
In some cases, these can total to be more than what it would cost you to rent a similar place, especially over a short time horizon (less than 4 years). The reason for this is because the interest on the mortgage is the greatest amount when the principal of the mortgage is still high (i.e., early in the mortgage).
Taking a completely arbitrary example (but using realistic numbers), let’s say you can afford a $250K home, you have $25K (10%) to put on the downpayment, with a 30-year fixed rate mortgage at 4.50%. The property tax rate in your area is 2.00%.
If you put that info into a mortgage calculator, it will say your mortgage payment is $1140/month (which includes the interest on the mortgage, plus your principal payment). “Sweet!” you say, because that’s pretty affordable for a $250K home. But wait.
  • Property tax = $4500/year = $375/mo
  • HOI = $87.50/mo (Source: Zillow, $35/mo per $100K of home value)
  • Flood insurance = cost can vary from $0 to a LOT (over $100/mo)
  • Mortgage insurance = $93.75/mo (assuming 0.5% of borrowed amount of $225K)
  • Maintenance/repairs = $2500/year = $208/mo (based on 1% of home’s value to use or save toward repairs)
How much you might spend on realtors, lawyers, and condo fees is completely dependent on the situation, and I won’t swag those numbers here. Hopefully I’m able to make my point without them—just keep those costs in mind if they apply to your situation.
Now, if you total all of that up, what you get is: $1904 and change per month to own. Plus, you’re building equity in the home! All the better. But if you take a closer look at that mortgage payment of $1140, there’s something important. How much interest are you paying versus principal in that $1140?
You can’t quantify this as a set number, because it changes every month. When you make a payment, part of the principal is reduced, so the interest on the principal is less the next month. But you can average it out over set periods of time.
In this example, with your very first $1140 payment you pay $844 in interest and $296 towards equity. Over the first year, you will have made $13,680 in total mortgage payments; $10,050 of that will have been purely interest on the loan. Only $3630 will have been equity in your home. After 4 years, the numbers are $54,720 total, of which $39,170 is interest and $15,550 is equity. In that 4 year span of time, the average amount you paid in mortgage interest per month was $816 ($39,170 divided by 48 months).
So, the final analysis has to be: once I tally all the money that goes out the door when I buy, is it more or less than what I can rent (which is also money out the door)? In this example:
  • 816 (average mortgage interest over 4 years) +
  • 375 (taxes) +
  • 87.50 (HOI) +
  • 93.75 (PMI) +
  • 208 (repairs fund) +
  • Any “other” costs (lawyer, realtor, condo, flood insurance, etc.)
Total = $1580, plus “other” costs. (Yes, I acknowledge some will say $200/mo for repairs is a lot, but you have to budget for repairs somehow, and a good rule of thumb is 1% of the value of the home per year.)
If you can rent a place that fits your needs for $1580 or less, you’re doing better renting the place than you would if you bought the $250K house in this example. You can invest/save what equity you would be building, plus you don't take on the risk of owning the home (depreciation, unforeseen costs).
TL;DR – Yes, you never see your rent money again, but there’s a ton of money when you own a home that you never see again either. You need to make sure the dead money when owning is less than the dead money when renting.

Lease Purchase Home Sales

The skinny on lease-to-own home sales

A lease-to-own house purchase is a lease combined with an option to buy the property within a specified period, usually three years or less, at an agreed-upon price.
In recent years, I have written several articles on LTOs, and they are among the most read on my website. The reason: LTOs offer the hope of home ownership to many who can't meet purchase requirements any other way. They also offer would-be sellers an opportunity to sell at a more attractive price than might otherwise be available.
Each side in an LTO transaction comes into it because of a weakness. In the buyers' case, it almost always is that they cannot qualify for the mortgage they need to finance a purchase. They may have a foreclosure on their record they must wait out or a credit score too low to meet lender requirements.
The LTO presents the opportunity to bet on themselves - the bet is that before the option period expires, they will qualify for the mortgage they need to exercise the purchase option.
In the sellers' case, the weakness is an inability to sell at what they consider the correct value. That could be because property values in the area have declined. The LTO offers the prospect of being able to sell in the future at a substantially higher price than is available today.
Another possible weakness that has become important in recent years is that the condition of the house is poor and the owner does not have the means to fix it. An LTO buyer is not as likely to be fussy about the condition of the house, and may be positioned to fix the deficiencies during the option period.

Contractual provisions. In a typical LTO arrangement, the borrower pays an option fee, 1 percent to 5 percent of the price, which is credited to the purchase price.
The borrower pays a market-rate rent and an additional payment that is credited toward the purchase price. The option fee, option period, rent, rent-credit payment, and purchase price are all negotiable. If the purchase option is not exercised, the buyers lose both the option fee and the rent-credit payment.
To the buyers, the option fee and rent-credit payment are part of the equity in the house they fully expect to own. To the sellers, however, these payments are the best guarantee that the house will sell; if it doesn't sell, the payments are retained as income.
That the benefit to the seller generally exceeds the cost to the buyer makes the lease-to-own deal a potential win-win.
Rent-credit payment. This is unique to LTO deals. It is an amount above the market-rate rent paid by the buyers that is credited back to the buyer at closing. Rent credits can be used in two different ways, which are not always distinguished.
The simplest approach reduces the sale price at closing by the total rent credit paid by the buyers. That reduces the required down payment only slightly. For example, if the sale price is $100,000 and the rent credit totals $5,000, the sale price becomes $95,000 and the down payment required at 5 percent falls from $5,000 to $4,750.

The rent credit is much more useful to the buyers if it can be used for the down payment in its entirety. If the rent credit of $5,000 in the example above is used in that way, the price of the house would remain at $100,000 but the buyers would receive $5,000 from the sellers at closing that could be used as down payment.
For that to work, however, the lender must accept the rent credit as legitimate savings by the buyers. To be sure that the rent credit is an amount paid above a fair market rent, the lender will require that the market rent be documented by an appraisal. To be sure that the buyers actually made the payments, the lender will want to see the canceled checks for the payments.
A more complete list of provisions that buyers and sellers can use in negotiating an LTO is on my website,

The LTO calculator. Mainly of interest to potential sellers, my LTO calculator, developed with Chuck Freedenberg of DecisionAide Analytics, allows sellers to view an LTO as an investment generating an attractive rate of return, relative to what the sellers could obtain by getting the best price in the current market.
The investment return is net of the costs of ownership during the option period, including mortgage-interest payments, property taxes, homeowners' insurance and other expenses of ownership. The calculator is available on my website.
Jack Guttentag is professor emeritus of finance at the Wharton School of the University of Pennsylvania.


Rent-to-Own Luxury Homes

Signing a lease option helps jumbo-mortgage borrowers save for a higher down payment, get their credit history in order and lock in on their dream-home purchase

 Illustration: Chris Gash   By Anya Martin  
A rent-to-own luxury home may help potential homeowners buy some time before it’s buying time.For potential jumbo-mortgage borrowers, a lease option gives future buyers the opportunity to save for a higher down payment or get a credit history in order, while locking in on their future purchase, says Linda Rheinberger, a broker with Berkshire Hathaway HomeServices in Las Vegas.On their end, sellers typically agree to a lease option as a way to cover their mortgage payments or make additional income until the sales market improves, Ms. Rheinberger adds. Here’s how it works: In most cases, renters agree to a lease option that allows them to either buy or walk away from the property at the end of the rental term, usually two years, says Steve Goddard, a manager with Re/MAX Estate Properties in Manhattan Beach, Calif. They pay a deposit, or “option consideration,” usually no more than 2% to 2.5% of the home’s market value, he adds. The deposit will be credited toward the down payment if the home is purchased. If the renter decides not to buy, the seller keeps the deposit, Mr. Goddard says. In some cases, the monthly rental payments will be higher than the going rate for comparable properties in the local market. That payment portion above market rate will be applied to the home purchase, says David M. Gladstone, a real-estate attorney based in White Plains, N.Y. If a portion of rent money is to be credited to the down payment, the mortgage lender will want to see that spelled out in the contract, as well as documentation that the additional amount is in excess of fair market rental rates, says Peter Grabel, managing director of Stamford, Conn.-based Luxury Mortgage. It cannot just be a verbal or handshake agreement with the landlord/seller, he says. Most lease-option agreements don’t set a sale price in stone and instead stipulate some measure to reflect current home values at the eventual time of the purchase, Mr. Gladstone says. Sellers/landlords used to use the consumer-price index to account for inflation, but they now often use other indicators that more directly reflect area home price growth, he adds. In short, the lease contract should contain not just a rental agreement but also incorporate fully the future sales contract terms, Mr. Gladstone says. “The terms are worked out so a seller cannot frustrate the attempt to buy if you want to go ahead, avoiding renegotiation later,” he adds. The lease agreement may benefit the buyer when it comes time to apply for a mortgage, Mr. Grabel says. “The fact that you are able to pay a certain amount of rent for a certain period shows the ability you will be able to pay the mortgage payment,” he adds. Typically, jumbo mortgages require at least 20% down, a credit score of 680 or above and six months to a year or more of reserves, Mr. Grabel says. Jumbo mortgages have loan limits higher than government-backed loans—$417,000 in most places and $625,500 in some high-price areas such as San Francisco and New York City. Many lease landlords are individual sellers, but some are investors who may own a large number of properties with lease options. During the early-to-mid 2000s, the latter category receded from this market as credit loosening made it possible for even cash-strapped borrowers to qualify for a mortgage. However, tight postrecession lending brought some new players to enter this space. For example, rent-to-own company Home Partners of America, which was founded three years ago, purchased 320 homes in June for $100 million. Here are a few more tips when planning to lease:                                                                                                                                                                                                                                                                                                                                                                                         .Repair Repair responsibility. A seller/landlord may expect a buyer/renter to be responsible for a greater share of repairs and improvements than a straight rental landlord, Ms. Rheinberger says. The contract should specify what the landlord is responsible for, including structural or storm damage, which may be covered by the homeowners’ but not renters’ insurance policies, Mr. Gladstone says. • Inspect. A leasee should go the extra step of hiring a home inspector. The findings will influence negotiations over the future sales, Ms. Rheinberger says. A formal appraisal may not be necessary before signing a lease option, but a renter/buyer may still wish to check values with comparable homes in the area using online data or with the help of a real-estate agent, she adds. • Anticipate mortgage qualification. Use the leasing period to pay off a car loan to reduce debt-to-income ratio. Self-employed business owners may want to reduce their deductions on tax returns, which will later be used for income qualification, Mr. Grabel  says. 


Saturday, April 30, 2016

First time Homebuyers Need 64,000 Salary

First time buyers 'will need £64,000 salary' to afford a house by 2020: Amount needed to soar by a fifth as property prices and meagre pay rises are blamed for the trend 

  • Increase of a fifth on £52,000 needed to secure typical starter home today
  • In London income of £106,000 and £138,000 deposit needed to buy a home
  • Based on average house of first time buyers costing £558,000 by 2020
  • If wages grow at the same pace the average salary will be £29,532 by 2020 

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