Publication Date: Friday Nov 14, 1997

Finding financing for lease-option home

QAlmost two years ago, my wife and I leased a house with an option to buy it for $127,000. We put down $3,000 and moved in. The house was a mess, so we painted it. But the landlord recently had the house appraised for $108,000. Now she says our $3,000 will not go toward purchase of the house. My wife and I really like this house, for which we have been paying $800 per month rent. The lease-option is almost up. How can we find financing to buy, or have we been taken? What recourse do we have? AI presume you have a written lease-option contract. The landlord can't refuse to apply your $3,000 option money toward your purchase of the home. Perhaps the landlord got an appraiser to make a low appraisal to discourage you from exercising your purchase option. If the house has actually lost market value, that was your risk. Had the house gone up in market value, then you would have profited.

If you qualify for a VA mortgage, no down payment is required. FHA home loans require 3 to 5 percent down payments. Fannie Mae offers 3 percent down payment mortgages. A local mortgage broker can explain your home finance alternatives.

Please consult a local real estate attorney if your landlord gives you difficulty exercising your purchase option or applying your $3,000 to the purchase price. Of course, if the home has really declined in value to $108,000, you certainly don't want to exercise your $127,000 option. QI am especially interested in learning about Starker delayed tax-deferred exchanges for rental properties. But you recently said in an article that "There is no reference to Starker exchanges in the tax code." I looked on the Internet, but can't find any information there, either. In the next year or so, we expect the state to take our business property under eminent domain condemnation to widen a state road. It was very upsetting when our CPA said we will have to pay 28 percent capital gains tax even though we will be forced to sell our property. Can we instead use a Starker delayed exchange? AYou need a new CPA who understands real estate taxation. He should have told you about Internal Revenue Code 1033 for involuntary conversions. It gives you at least two years to reinvest proceeds from a condemnation such as the one you describe. Since you will be selling your property to the state, another possibility is a Starker delayed exchange using Internal Revenue Code 1031(a)(3). You then have 45 days after the sale to designate the qualified property to be acquired and 180 days to complete the acquisition. Please consult another CPA or a tax attorney for details. QOur condominium homeowner's association board of directors wants to spend $1.5 million on tuck-pointing brick work and new windows in 1998. I thought there was a maximum of $75,000 expense the board can approve without a vote of the condo owners. AYou neglected to tell me in what state your condo is located. Please review your condo association's CC&Rs (covenants, conditions and restrictions) to learn the maximum expense the board of directors can approve without a vote of the association members. If you don't find any limitations there, you'll need to consult a condominium attorney to research your state's law for any restrictions. QI've heard several radio ads for 125 percent "bill consolidation. home loans. They sound very attractive. what's the catch? AThese new mortgages are made both on the basis of your home's market value and your credit history. They are really combination real estate and personal loans. Since they are very high-risk mortgages for the lenders, the interest rates are high, too. The lowest interest rate I've seen is 11 percent and the highest is 16 percent.

Overfinance, high-ratio mortgages are advertised as "bill consolidation" loans so they sound more affordable than the 18 to 22 percent interest rates credit cards and department stores charge. But the catch is that these new loans are long-term, for 15 to 30 years, so the borrower will pay more total interest than for shorter-term credit card financing.

The big unknown with these high-risk loans is how many homeowners will take out these overfinanced mortgages and later "walk away," leaving the lender to foreclose on a mortgage with a higher balance than the home is worth. To minimize this risk, borrowers must have very good credit, so their probability of default is low. QI am considering purchasing a beautiful 40-acre land parcel near a major highway. It is zoned agricultural, but can probably be rezoned to commercial for a strip shopping center. My problem is that the only mortgage I can obtain is for just 55 percent of the purchase price. The bank that foreclosed on the land is the seller. What do you think of a situation like this as an investment? AOf course, I can't give an opinion on a specific investment. But in general, vacant land investments are considered very high risk, for many reasons. These include: little or no income production, high carrying costs, the expense of development to produce a profit and limited buyer demand. There's probably a good reason the previous owner defaulted and let the bank foreclose on its mortgage. Since the lender will only loan 55 percent of the sales price, that tells you the lender realizes the land you are considering is a high-risk situation. Unless you can financially handle such a risk, and have experience developing strip shopping centers, I suggest you buy less risky realty investments such as rental houses. QAs a mortgage broker for the last 11 years, I fear you paint too negative a picture for home buyers who have bad credit. Today, we can finance virtually any home buyer, no matter how bad his or her credit history. Of course, those with poor credit will pay higher interest rates than those with excellent credit. But there are now lots of mortgage lenders seeking the B, C and D quality mortgages, because they are willing to take the higher risk in return for high interest rates, currently 10 to 15 percent. AThank you for reminding us that mortgage money was never more abundant than it is today. As I often suggest, home buyers should get preapproved (not just prequalified) for a home loan before they shop for a home to purchase. By knowing the maximum mortgage available, buyers can shop with confidence that they can finance their home purchase. Robert Bruss is a Bay Area real estate broker and attorney. His column appears the second and fifth Friday of the month. Send questions to Bruss care of Palo Alto Weekly, P.O. Box 1610, Palo Alto, CA 94302. On all tax-related matters, Bruss recommends that you consult your tax adviser for further details.



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