Home ownership 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, security, and it’s an asset 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 goes up, and this is the financial ‘nest egg’ of most workers.
Property Cycle – When To Buy
The real estate market has had its the 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 recovery phase of the cycle 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’ the property prices are coming off a slump or bust and are rising, and this 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 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 prevalent type of 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 favourable terms for the vendor even if the property purchase amount is less than another offer of purchase.
The purchaser does need to know the home can be released from the lender with the price they’re willing to pay out. Most people can not buy a home outright so to pay for it they secure a home loan and contribute with their funds too 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 owing on the property.
Rent with option
With the rent with option, buyers without a deposit, or funding approval to purchase a property outright can rent with an option to buy later on. 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 house later on.
In the meantime, the buyer rents the property until that time comes, and they can purchase it. There are various options in the agreement 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 with 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. In a nutshell, 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 on in this article.
Cash offers are usually for less than the real market value for the property. 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 sale done whatever the condition of the property. A cash offer can be better for a seller in other circumstances too.
The seller doesn’t even need to pay for repairs or making the house look good. If the buyer sees the place for 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 duration of rent, which is also usually from 1 to 3 years. But the rental value is usually 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 has the option of purchasing the house or having their lease expired without making the transaction. And as always, the option money is non-refundable in any case.
Contract for Deeds
This one is rather different than most lending options out there, and it usually works with buyers who do not qualify for traditional lending options. So, what happens is the buyer, and the seller agree 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 the all payments have been made, the buyer can legally own the place.
The average duration for a contract for deeds is 5 years, but it can even be more than that depending on the agreement between the buyer and the seller. A very cool option to this contract is the fact that interest rates are not regulated so that 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.
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