My daughter is looking to buy a first home. She and her fiancee have a good six figure income between the two of them, but even with some financial help from family, they do not have down payment of $100,000 to $200,000 for a California “starter home”! They have some alternatives to consider.
1. purchase a condo or townhome for less money than a single family home and in time “move up” to a single family home when equity appreciation helps them accumulate a larger downpayment.
2. purchase a more affordable single family home quite a distance away from their jobs and commute to work for hours and hours.
3. look into a website that matches investors with buyers for equity share arrangements. An example would be http://www.homeequityshare.com/how-it-works/
4. Continue to rent in California, but purchase non owner occupied rental property in parts of the country that have not yet experienced a price run up. Homes in these areas are still available for $200,000 and downpayment of 10% is only $20,000 which can be saved up by a first time buyer. Then by working with an investment group that specializes in helping California investers learn about and research out of state properties and by picking up and renting out two or three properties in the next couple of years they could build up enough equity to refinance and actually choose to put down on a California property. I would not recommend selling the rentals and incurring a tax event, but just pull some cash out within the tax laws to perhaps purchase a duplex in California. She could live in one unit and rent out the other. It will pay off to minimize the cost of the primary residence and maximize the dollars invested in rentals. Your home is a consumption item and the rentals are the true investments. Within five years she woould be in a position to 1031 exchange her rental properties into larger apartment buildings, for example. Her net worth and cash flow would be enough to be able to afford a high end California home. She will get to a goal of living in a dream home by investing and letting investments compound for her and not by stretching and scrimping to buy a first home and eating potatoes for years.
Here is a link to some real estate invesment clubs, some of which will focus on out-of-state investing.
5. Take a creative real estate finance course and find sellers who are desperate to sell. Solve their cash problem and negotiate a purchase with equity built into the deal.
6. Purchase a short sale or foreclosure property from a bank or at auction.
7. Make a lease option offer to the seller. In a buyer’s market it is likely that a seller is motivated to sell and if that is not possible at the right price the seller would prefer to rent out the property, generate rentalincoem to help cover the cost of the current mortgage, and then sell when the market improves. The prospective buyer can make a lease option offer to the seller that is win-win. Seller gets a conscientious renter who will take care of the property and pay rent so seller gets help carrying the property. Buyer gets to move into the property and live in it, gets a first right of refusal to purchase within a certain time frame and under certain negotiated pricing and terms. The terms would involve a certain option price, payment terms of the option, conversion terms of the rent into contribution towards purchase, method of setting sales price when option is exercised. This gives the buyer time to accumulate downpayment and assess the property while living in it. While the seller will wish to lock in the pricing up front, the buyer may be able to negotiate a pricing process that involves getting a current appraisal at the exercise of the option and so be somewhat protected from buying high in a declining market.
Everything is negotiable and if the buyer listens to the needs of the seller he or she can make a good offer that is truly win-win.
Here are some links to lease option websites.
http://www.realestatejournal.com/columnists/housetalk/20070702-fletcher.html
http://www.homeequityshare.com/how-it-works/
http://www.realestateabc.com/answers/option.htm
http://www.bayhouse.com/lease-options.shtml
http://www.lease2purchase.com/
How would you advise someone you know that is in this situation?
