Did you realize that more than 1/3 of homeowners in this country have less than 20% equity? In addition to that surprising figure there are also 10 million homeowners that still owe more than their home is currently worth. That’s not to say that things aren’t improving however. The market and general economy is improving steadily (if slowly) but there is still a long way to go for those of us that took a hit when the housing bubble burst.
It’s bad enough to own a home that is underwater but the situation becomes much worse if you need to sell quickly and simply don’t have the time to wait for things to change. Time is often the cure for homeowners with negative equity because the future appreciation of a home as well as additional mortgage payments will eventually solve the problem. But with if you need to sell now due to a job transfer, death in the family or some other unforeseen circumstance?
Naturally most people want to avoid a short sale or foreclosure if at all possible and being forced to use one of these methods when you can afford to pay your mortgage certainly doesn’t seem to be very the best option. A long term lease option is one possible way to avoid this dilemma. By turning the payments over to someone else they will have the possibility of benefitting in the future as the property slowly increases in value and you will have the benefit of avoiding a more drastic solution such as foreclosure.
As an example, let’s say that you originally bought your home for $250,000. Unfortunately its current market value is only $200,000 and the balance owed on the mortgage is $221,000. Fortunately you are not behind on the mortgage but would take a loss if you sold the home at this time. You could market your home to persons that are interested in a long term lease (say 2 years as an example) with the right to renew an additional 4 times at their discretion. At any time during the lease they could decide to buy the home for the remaining balance of the mortgage. This allows them the time to decide if they will actually purchase the home or move on.
Both parties benefit from this type of lease because the homeowner does not need to worry about paying the mortgage for a minimum period of 2 years thus freeing them up for the move! The persons leasing the home are able to wait and see if the home appreciates enough in value to be worth purchasing and also benefit from a lower sale price as the mortgage balance is reduced due to the fact that the mortgage payments are being made on time every month. In these types of arrangements the monthly payment is often less than rental prices in most areas as well. Everyone wins in this situation and there is no short sale or foreclosure to contend with for the homeowner.
Based on the above example, the value of the home after 10 years would be $270,000 (based on a modest 3% appreciation each year). Considering that the mortgage payments were made on time, the lessee could then purchase the home for what is currently owed and still have over $100,000 in equity! The homeowner had gotten out of a bad situation with their credit intact and the new homeowner has made a very wise investment. Naturally there are specifics to be worked out such as the amount of the security deposit to be agreed upon and who would be responsible for the maintenance and upkeep but regardless of the final agreement, both parties can benefit significantly from this type of arrangement.