> Buyers' Advice
Lease Options Appear In High-End Markets
by Broderick Perkins
The lease option path to home ownership is a hard sell for the tough, high-cost Northern California market, but it is a home buying option to purchase a home years from now at today's prices. The program, successfully test and marketed elsewhere in the nation, is finally widely available in the San Francisco Bay Area and, unlike most other special home buying programs, it isn't just for first-time home buyers or those with top-notch credit. "I have been a part of several other lease option programs over the past 14 years and when I talk to Realtors and clients about this one they are truly amazed and excited," said Bill Alden, president of Network Financial Services in San Jose, CA, the first mortgage broker in San Jose, CA to offer the new program. Once considered the Pandora's Box of creative financing, lease options can be a viable home buying alternative for savings-poor, but income-rich home buyers. That doesn't mean there aren't any caveats. The $48 million California Home Source Lease-Purchase program, set to serve some 200 home buyers, was designed by Freddie Mac and is administered by the Oakland-based Association of Bay Area Governments's Finance Authority for Nonprofit Corporations. The program is available to qualified home buyers in Alameda, Contra Costa, Marin, Napa, Solano, San Mateo, Santa Clara and San Francisco counties for households with incomes that do not exceed 140 percent of a given county's median income -- a maximum income level that ranges from $94,920 in Napa County to $147,700 in Santa Clara County. Qualified buyers can purchase a new or existing single-family detached home, condo, townhomes or a manufactured home, provided the manufactured home is permanently affixed to the land which is part of the sales price. The maximum home price is $600,000. The program allows you to choose the home you want to buy, which is in turn purchased by California Home Source. California Home Source pays the closing costs, takes on the mortgage and leases the home back to you. You must pay an up-front non-refundable administrative fee equal to one percent of the purchase price of the home and, for 39 months, make monthly on-time lease payments equal to the actual mortgage payment. You also must attend up to 12 hours of home ownership and financial counseling classes, maintain the home, pay any home warranty fees for repairs and, if you have severe credit problems, obtain additional counseling assistance for a fee. "If the client has a credit score below 620 they will be required to meet with a debt management counselor that has been assigned to the program. There is a $200 fee that the client must pay for this service," said Alden. Typically, such clients are those with collection action or charge offs in their credit history. At end of the lease, you can assume the remaining mortgage balance at no additional cost. You may assume the loan earlier, but you will have to pay an early assumption penalty based on the number of days remaining on the lease period. The devil is in the details. The monthly payments give you the opportunity to experience what it's like to pay a real mortgage, and you'll soon discover, it isn't easy. A lease-option program mortgage for $333,700 or less comes with a "silent second" loan for three percent of the purchase amount at a five percent simple-interest-only rate. "The payment (on the silent second) is deferred until the home is sold or the mortgage refinanced," said Matt Callahan, program administrator at California Home Source. It's the first mortgage that puts the big dent in your wallet. The first mortgage (on loans of $333,700 or less) for 97 percent of the home's purchase price comes with an interest rate of 6.125. The loan is a 7/1 adjustable-rate mortgage (ARM) -- a mortgage that remains fixed for seven years and then adjusts once a year, each year thereafter. For larger, so-called "jumbo loans" of up to $600,000, there is one 100 percent loan financed with the same 7/1 ARM and the 6.125 percent rate. The rate is about two percentage points higher than the going rate for conventional 7/1 ARMs, but still a bargain for those with impaired credit histories who may otherwise not be able to land a loan. "It's close to an A rate for clients who have C or D credit profiles. It's better than subprime," said Callahan. But be prepared to shell out about $2,461 a month for 39 months for a $300,000 loan and $5,071 a month for the maximum $600,000 loan. The amount includes principle, interest, taxes, insurance, and private mortgage insurance (MI). Private mortgage insurance is insurance that protects the lender, not you, from default, but you pay the premium. "The APR is high because it's 100 percent financing. That's risky business and Tom Cruise stars in it. Also, the money you are paying at first, you don't get to write it off as interest, so it gets to be fairly expensive interest. It's a highly leveraged loan," said Ray Brown, San Francisco broker and co-author of Mortgages For Dummies (John P. Wiley, $16.99). You'll also have to find a seller or real estate agent willing to contribute to the program a matching administrative fee of one percent of the sales price of the home. That amount can reduce an agent's commission or the sellers take-home -- but not always. "The program requires a two percent administrative fee. We can get one from the buyer. Sellers are willing to do that if they are netting the amount they want. Also, the purchase price can be adjusted. It's up to the real estate agent to creatively present it as not a burden on the seller, but it's not unusual for the seller to contribute something back to the purchase price," said Callahan. Some real estate agents would beg to differ. In a seller's market, sellers want what they can earn from the sale of their home. Also, sellers who've maxed out their equity with a large refinanced first mortgage or an added-on equity loan that pushes their total mortgage debt up to the value of their home, aren't likely to want to part with one percent -- or any percentage -- of their sales price. It's the same reason grant programs requiring a seller's financial contribution don't work well in hot and high-end markets. "Lease options are very rare in hot markets like Silicon Valley, especially when there are multiple offers. Lease options work better in slow markets where the seller would basically make a sacrifice to enter into that type of arrangement," said Janet Houde, an independent real estate broker in San Jose and president of the Santa Clara County Association of Realtors. Callahan concedes, while there are a couple-hundred program participants out shopping for a home, only 11 loans have actually closed since the program began six months ago. Also, chances are, the San Francisco Bay Area's housing market won't crumble, but if prices are depressed at the end of the 39-month program period, buyers who opt to assume the mortgage could get stuck with a home priced higher than the current market prices. Perhaps the greatest downside is a decision, for whatever reason, not to assume the mortgage. If you don't assume the mortgage you lose all the money you've paid into the program. That's nearly $100,000 on a $300,000 mortgage. But the glass could be half full. "The important thing for consumers to know is that they will eventually get access to all the equity if prices appreciate as long as they continue to occupy the home for three more years," after they assume the mortgage, said Callahan. | 
