Fractional ownership simply means the division of any asset into portions or shares. If the “asset” is a property, the title or deed can be legally divided into shares. In certain instances this is done by creating a “mezzanine structure”, i.e. creating a company which owns the property then allowing multiple owners or investors to own shares in the company. Those shares can then be purchased and owned by more than one individual. The reasons for a “mezzanine structure” can vary. Two common reasons are to allow transfer of shares without the need to reflect changes on the title or deed to the property, and for tax benefits.
Shared ownership of the property and its deed will also entitle shareholders to certain usage rights, usually in the form of weeks. Conceptually, fractional ownership is not the same as timeshare. Fractional ownership affords much of the freedom and usage benefits offered in timeshare, however, the fundamental difference with fractional ownership is that the purchaser owns part of the title (as opposed to units of “time”). Therefore, if the property appreciates in value, then so do the shares. As with whole ownership, fractional owners can sell whenever they deem necessary or prudent, releasing the capital growth from their “bricks & mortar” investment.
What you need to know before you decide to enter a lease-to-own agreement.
If you’re a cash-challenged home buyer, a lease-to-own agreement may be a way to buy a home and accumulate a down payment. A lease-option also gives you a chance to check out the neighborhood and occupy the home before you decide whether you want to buy it.
What is a lease-to-own or lease-option agreement?
A lease-option agreement is both a lease that allows you to occupy the home and an option that allows you to purchase the home in the future at an agreed-upon price.
A typical lease-option agreement requires you to pay a somewhat higher monthly rent for the home and obligates the owner to credit a portion of that rent toward your down payment. For example, if the owner’s expected market rent were $1,500 per month, he or she might increase that to $1,800 per month and apply $300 per month to your down payment. After one year, you would have a down payment credit of $3,600.
A formal contract is a must.
A lease-option agreement should be formalized in a written contract that specifies the monthly rent, the amount of rent that will be credited to the down payment, the sales price and the expiration date of the option. Any contingencies (e.g., your right to obtain a home inspection) or other important terms of the agreement should be stated in the contract as well.
A lease-option allows the owner to sell the home to you without paying a commission to a real estate broker. But keep in mind that the transaction is thus bereft of a broker’s advice, expertise and assistance. Payment of other closing costs such as title insurance and transfer fees is subject to negotiation and should be addressed in either the lease-option contract or a later addendum to that contract.
Lease-option isn’t an obligation to buy.
A lease-option doesn’t obligate you to purchase the home; rather, it is simply an opportunity to do so with the advantages of a known purchase price and a rent credit toward the down payment. If you elect not to exercise the option to purchase the home, your credited rent usually is forfeited to the owner. This money is a form of compensation to the owner for the option, which compromises his or her freedom to sell the property to someone else during that time. Reasons why you might decide not to exercise an option include lower property values in the area, an inability to obtain a mortgage, a job transfer or disenchantment with the neighborhood or the home, among others.
Who pays taxes, insurance, repairs?
The owner is responsible for property taxes, insurance, and maintenance of the property during the lease-option term since you have no ownership interest in the property. Likewise, the owner, not you, would suffer a loss if the property were damaged or destroyed by a natural disaster that occurred during your lease-option term. Repairs are typically negotiated up front, typically the owner will requir the buyer take responsibility for the first $500.00 of all repair costs. Remember a Lease-to-Own is not a Landlord\Renter relationship, so changing burned out light bulbs and leaky fixtures are the responsibility of the Buyer. Nonetheless, you may want to purchase separate insurance to cover your own personal belongings. Of course, once you purchase the property at the end of the lease-option term, you’ll be responsible for the taxes, insurance, and repairs related to the home.
Because lease-to-own agreements can be complex legal arrangements, we recommend you contact an attorney to make sure your interests are protected.
A bridge loan is interim financing for an individual or business until permanent or the next stage of financing can be obtained. Money from the new financing is generally used to “take out” (i.e. to pay back) the bridge loan, as well as other capitalization needs.
Bridge loans are typically more expensive than conventional financing to compensate for the additional risk of the loan. Bridge loans typically have a higher interest rate, points and other costs that are amortized over a shorter period, and various fees and other “sweeteners” (such as equity participation by the lender in some loans). The lender also may require cross-collateralization and a lower loan-to-value ratio. On the other hand they are typically arranged quickly with relatively little documentation.
In real estate
Bridge loans are often used for commercial real estate purchases to quickly close on a property, retrieve real estate from foreclosure, or take advantage of a short-term opportunity in order to secure long term financing. Bridge loans on a property are typically paid back when the property is sold, refinanced with a traditional lender, the borrower’s creditworthiness improves, the property is improved or completed, or there is a specific improvement or change that allows a permanent or subsequent round of mortgage financing to occur. The timing issue may arise from project phases with different cash needs and risk profiles as much as ability to secure funding.
A bridge loan is similar to and overlaps with a hard money loan. Both are non-standard loans obtained due to short-term, or unusual, circumstances. The difference is that hard money refers to the lending source, usually an individual, investment pool, or private company that is not a bank in the business of making high risk, high interest loans, whereas a bridge loan refers to the duration of the loan.
Bridge loan interest rates are usually 12–15%, with typical terms of up to 12 months 2–4 points may be charged. Loan-to-value (LTV) ratios generally do not exceed 65% for commercial properties, or 80% for residential properties, based on appraised value.
A bridge loan may be closed, meaning it is available for a predetermined timeframe, or open in that there is no fixed payoff date (although there may be a required payoff after a certain time).
A first charge bridging loan is generally available at a higher LTV than a second charge bridging loan due to the lower level of risk involved, many UK lenders will steer clear of second charge lending altogether.
Lower LTV’s may also attract lower rates again representing the lower level of underwriting risk although front-end fees, lenders legal fees, and valuation payments may remain fixed.
- A bridge loan is often obtained by developers to carry a project while permit approval is sought. Because there is no guarantee the project will happen, the loan might be at a high interest rate and from a specialized lending source that will accept the risk. Once the project is fully entitled, it becomes eligible for loans from more conventional sources that are at lower-interest, for a longer term, and in a greater amount. A construction loan would then be obtained to take out the bridge loan and fund completion of the project.
- A consumer is purchasing a new residence and plans to make a down payment with the proceeds from the sale of a currently owned home. The currently owned home will not close until after the close of the new residence. A bridge loan allows the buyer to take equity out of the current home and use it as down payment on the new residence, with the expectation that the current home will close within a short time frame and the bridge loan will be repaid.
- A bridging loan can be used by a business to ensure continued smooth operation during a time when for example one senior partner wishes to leave whilst another wishes to continue the business. The bridging loan could be made based on the value of the company premises allowing funds to be raised via other sources for example a management buy in.
- A property may be offered at a discount if the purchaser can complete quickly with the discount off setting the costs of the short term bridging loan used to complete. In auction property purchases where the purchaser has only 14–28 days to complete long term lending such as a buy to let mortgage may not be viable in that time frame where as a bridging loan would be.
What Does Rule Of 72 Mean?
A rule stating that in order to find the number of years required to double your money at a given interest rate, you divide the compound return into 72. The result is the approximate number of years that it will take for your investment to double.
For example, if you want to know how long it will take to double your money at 12% interest, divide 12 into 72 and you get six years.
When dealing with low rates of return, the Rule of 72 is fairly accurate. This chart compares the numbers given by the rule of 72 and the actual number of years it takes an investment to double.
|Rate of Return||Rule of 72||Actual # of Years||Difference (#) of Years|
The lease option fee is the cost of the option to purchase the home. The option lasts for the length of the rental term, typically. In other words, if the rental term is three years, the option gives you the right, but not the obligation, to purchase the home anytime during those three years. When you negotiate the option fee, keep three key factors in mind:
The amount of the option fee (about 1% of purchase price)
Whether the fee is refundable (generally no)
Whether the fee applies to the purchase of the home (generally yes)
First, of course, is the amount of the fee. As a rule of thumb, 1% of the purchase price of the home is reasonable. The homes we rent range in value from about $130,000 to $175,000. The option fees we charge generally range between $1,450 and $1,950, which is slightly higher than 1%. However, we do not require tenants to put down a security deposit on a lease purchase deal. I’ve seen landlords ask for and get option fees as high as 5%. I suppose if they can get it, why not ask. But as a tenant, 5% is just too high in most cases. If a property owner is asking for 5%, negotiate or keep looking.
Second, recognize that option fees are non-refundable. If you don’t buy the home, the landlord still keeps the fee. In this way, a lease option for a home is similar to an option contract on a stock. The cost of the option is not refundable even if you chose not to exercise the option. As a result, you should think carefully through the transaction and whether you really want to purchase the home and whether you’ll have the financial means to do so during the term of the option.
Finally, make sure that the fee will go toward your down payment if you exercise the option to buy. While this is typical in my experience, you may find some landlords who seek to treat some or all of the option fee differently.
In most lease purchase arrangements, the tenant receives a credit that will go toward the purchase price if they buy the property. While there is no universally agreed upon amount, for residential real estate, 10% to 15% of the monthly rent seems to be a good rule of thumb. For a home costing $1,295 a month, for example, we offer a monthly rent credit of about $150. The rent credit is an important part of the deal for tenants for at least two reasons.
First, it of course reduces the cost of the home when you exercise the option. And second, it can help you build up a down payment on the home. The key is to make sure that the deal includes a fair rent credit. Finally, we make the rent credit contingent on timely rent payments. If rent is late one month, the tenant loses the rent credit for that month.