Buying into college-town real estate

Consider lease-option among soft-market strategies

By Inman News Feed
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Consider lease-option among soft-market strategies

Tom Kelly
Inman News

National surveys attempting to determine the best places to live continue to include several college towns. The small-town environment is attractive for its slower pace and the athletic facilities and educational programs. College towns also remind many aging baby boomers of the places where they grew up or received their education and where they would ultimately like to return.

For example, two couples my wife and I have known for years have recently purchased a home near Western Washington University in Bellingham. When I inquired if the homes were going to be college rental investments, both couples said they plan to make the homes their primary residences.

One couple who wanted to be closer to two grown daughters had signed up to do volunteer work in the Bellingham area. The other couple planned to use the home as a jumping-off point for boating in the San Juan Islands and Queen Charlotte Straight.

I'd bet that many people would jump at the chance to sell their family home and "move down" to a smaller home in a different environment, such as a college town.

Not everyone can sell their present home and move right away. However, given the lower homes prices throughout much of the country, why not investigate ways of getting the home you want tomorrow ... at today's price?

Homeowners over 62 could consider a reverse mortgage for purchase. If the market is slow in your area, you could consider offering your buyer a lease with an option to buy. The same strategy could work for you by offering a lease-option to the seller of the home you want to buy.

Here are a few key components to the lease-option:

  • The buyer and seller agree on a purchase price, usually a figure somewhere between today's market value and the anticipated market value 12 months down the road.
  • The seller gives up tomorrow's presumably higher value for money in hand today. The buyer pays a bit more than today's value in exchange for very little cash down. Let's say buyer and seller agree the price will be $335,000.
  • The seller charges the buyer a nonrefundable fee for agreeing to this option. The amount can vary depending on factors such as how eager the seller is to move and the size and quality of the house. Typically, the higher the fee, the better the buyer maintains the property.

Let's use $3,000 for the fee in our hypothetical transaction. The fee is in addition to the monthly lease payments. And we'll have the seller give the buyer the right to purchase the property for $335,000 at any time within the 12-month lease period. If the option is exercised, the fee could be considered part of the downpayment.

The lessee has made no downpayment; hence, the monthly option fee is typically higher than rental market rates. The two parties agree on what portion of the rent will be applied to the downpayment. Any amount can be credited.

For example, if the monthly fee is $2,000, $800 could be credited to the downpayment. (If the seller really is not eager to sell, he may not agree to a higher rent credit.)

Buyer and seller must be sure to specify both lease and sale terms in the agreement. For example, when the time comes for the buyer to exercise the option, if the interest rates are at 8 percent, the buyer may not be able to qualify for a loan.

It's a good idea to set an interest-rate ceiling in the agreement, or ask the seller to finance the home when conventional rates hit a certain level.

There are plenty of potential renters (other than undergraduates) associated with a college or university who would be happy to rent a comfortable place close to campus.

The number of visiting professors to college campuses always is underestimated, as are the number of staffers (secretaries, security personnel, catering workers and librarians) who often are terrific rental-lease prospects.

Notes to human resource representatives have worked wonders in landing mature renters, as have inquiries posted in faculty lounges and on-campus faculty living areas. Graduate students (some married) also form a significant renter pool. Sometimes, professors seek alternative housing for highly coveted students.

If you want to move down the road, especially to a college town, see what's possible today. Some owners need to sell and could be open to different types of financing.

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