Home Purchase Offer Types Explained
Homeownership is a goal shared by most people in the western world, and it’s usually the most significant asset they will acquire in their lifetime. Owning your own home offers somewhere to live and security, an investment that, over time, appreciates, i.e., goes up in value. When you can own a home for many years, your home loan decreases and, ideally in time, is fully paid while the value increases, which is the financial ‘nest egg’ of most workers.
Property Cycle – When To Buy
The real estate market has had its peaks and troughs, and they’re cyclical hence they’re collectively known as the property cycle. The four main market conditions in the property cycle are:
The cycle’s recovery phase is a favorite time for both vendors selling and buyers looking to purchase a home. Why? Well, when the property market is in a slump, the property prices drop, and when the drop is dramatic, the market can move into the ‘bust’ phase, which is considered the bottom of the market. In a ‘recovery, ‘ property prices are coming off a slump or bust and are rising, which is usually an excellent time to purchase a home.
When buyers return to the market, they compete for the same properties, so it’s fundamental to know what the various home purchase offers and terms are so you can make a quick decision and get the property before your competition.
Standard or conventional sale
This is the most general sale agreement between a vendor (an entity selling the property) and the purchaser.
The vendor doesn’t usually need to know how the purchaser is funding the purchase, but if it’s a ‘cash offer’ or the settlement time is a lot less, this can be favorable terms for the vendor even if the property purchase amount is less than another offer of purchase.
The purchaser needs to know if the home can be released from the lender with the price they’re willing to pay. Most people can not buy a home outright, so to pay for it, they secure a home loan and contribute with their funds, called a deposit.
Even in a ‘recovery,” property prices can be lower than when the vendor purchased the property, and as such, the price the buyer is willing to pay may not cover what is owed on the property.
Rent with option
With the rent with the option, buyers without a deposit or funding approval to purchase a property outright can rent with an opportunity to buy later. The buyer and seller agree on a price, and then the buyer deposits a down payment on the house, which is usually 2 to 4 % of the total property price, and as per the agreement, the buyer has the option of buying a home later on.
In the meantime, the buyer rents the property until that time comes, and they can purchase it. The agreement has various options regarding when they need to make the purchase or forfeit the payments they have made to date.
This type of loan is issued by federal housing association (FHA) approved lenders. Insured by FHA, it is said to be one of the most popular loan types in the USA, especially for people who don’t have enough money to make a substantial down payment (deposit) on the house during the purchase.
The loan serves its purpose with low and moderate-income borrowers, and the great thing about it is FHA loans require a much smaller down payment or deposit than your typical mortgage, and your credit score doesn’t have to be that great either. If the buyer doesn’t earn enough money and has a less-than-perfect credit score, look at the terms of this type of home loan.
Cash Sale or Cash Offer
There’s always the option for a buyer to make a cash sale, aka cash offer, and we covered this option earlier in this article.
Cash offers are usually for less than the actuproperty’s actual market value. For a vendor to accept, they need to be motivated, and that usually happens when their property has remained on the market for sale for months, if not years. Some businesses seek out these properties and offer cash to get the deal done, whatever the property’s condition. A cash offer can be better for a seller in other circumstances too.
The seller doesn’t need to pay for repairs or make the house look good. If the buyer sees the place in its current condition and is willing to buy, they do it. Overall, it’s much less troublesome of a process for the seller if they’re distressed and want a sale.
The lease purchase works similarly to a ‘rent with the option’ offer. The buyer also puts down a down payment in exchange for a rent duration, which is usually from 1 to 3 years. But the rental value is generally higher in this case than the rent with option one, and it’s a bit higher than the market value.
The buyer and the seller agree on the purchase price at the beginning of the agreement, and at the end of the lease, the buyer can purchase the house or have their lease expire without making the transaction. And as always, the option money is non-refundable in any case.
Contract for Deeds
This one is somewhat different than most lending options, and it usually works with buyers who do not qualify for traditional lending options. So, what happens is the buyer, and the seller agrees on equal payments over an agreeable period in which the buyer should pay the entire value of the house. Until that time comes, the owner retains the legal title to the property, and once all payments have been made, the buyer can legally own the place.
The average duration for a contract for deeds is five years, but it can even be more than that depending on the agreement between the buyer and the seller. An excellent option for this contract is that interest rates are not regulated, so they can be as high or as low as the agreement between the two parties dictates. So it’s not a bad option to consider in certain situations.