Searching for the perfect home can be confusing when you don't understand listing types. To save you a few gray hairs, we took out the guesswork. Below are descriptions of different real estate listing types that you'll find on our site. The most common real estate listing types are: rent to own, owner financing, real estate owned, auction, short sales and for sale by owner (FSBO).
How do you rent to own a home?
Rent to own, also called lease with option to buy, is an agreement that you make with a buyer to rent a property for a preset amount of time and, eventually, purchase the property. It's similar to regular renting, except your actually saving towards purchasing a home instead of giving a landlord your full rent payment every month. Yes, part of the payment goes to the owner, but another part, called a premium, goes into an escrow account to help you save up for a down payment on the property.
You also have the option to purchase the property at any time throughout the lease. Unlike normal renting, you can end your contract with the landlord by buying the house.
People typically rent to own for two reasons,
1. They don't have enough money to put into a downpayment for a home.
2. Their credit score doesn't qualify them for a loan.
During the lease, you save money in an escrow account for the downpayment of the home and repair your credit, all while already living in the house. Rent to own is appealing because you can live in your dream home before it's even yours.
What does it mean when your house is financed by the owner?
Owner financing, or seller financing, means the owner is directly offering the property for sale and providing financing that lets buyers avoid needing a bank loan for move in. Owner Financing can be more flexible than bank loans. It gives some leeway for smaller down payments and less than perfect credit. Owner financing can easily be rent to own if the property has been on the market long enough.
In this scenario, the owner and buyer will issue a promissory note, a written agreement in which a promise of payment is made. This note will express an interest rate, a repayment schedule, and consequences for noncompliance. These agreements are usually short-term, around five years, and require a balloon payment once they end. A balloon payment is essentially a large, final payment made towards the loan/mortgage. Owner financing is fairly uncommon, so it’s best for the owner and buyer to seek legal counsel to make sure everything is up-to-code.
What is Real Estate Owned (REO)?
Real estate owned means the property was foreclosed and repossessed by a lender because the owner failed to make payments. Typically, that means the bank is now the owner. In other cases, it would be a government agency or government loan insurer.
Since banks are not in the business of owning homes, they are usually interested in selling foreclosed homes quickly at attractive low prices. A list price is published, but reasonable offers can be submitted for consideration. Offers can flow through the official listing agent but in some cases, no agent is listed, and offers can be submitted the bank owner directly.
What is an Auction Home?
A home can be auctioned at a public sale if it has been foreclosed on or repossessed by the bank. There is a tremendous potential to get the property for below market value. Properties up for auction often make for great investments.
The property is usually bid on at the county courthouse on a disclosed date and time set by the bank. The winning bidder will take possession of the house and will be required to pay any outstanding liens. Some states allow you to pay in full the following day, but most require proof of funds for the full price on the same day. Be sure to bring cash or a cashier’s check with you to the auction. Many trustees require a cash deposit before the bidding even begins. Check your state’s requirements for specific details. Certificates of sale are provided immediately, but you may wait as much as ten days to receive the certificate of title. Also, keep in mind that these homes are usually sold “as-is” and an inspection of the property may not be possible until after the bidding is over.
What is a Short Sale?
Short sales are when the sale price of a property will be less than the liens against the property. A lien is a person’s right to keep a property if the owner does not pay back a debt owed to the person. In these cases, if all lien holders agree to accept less than the amount owed on the debt, a sale of the property can take place. Keep in mind short sales have a longer process than most real estate sales ranging from about 60-90 days. Short sales are usually a good alternative to foreclosure. Lien holders do not have to agree to accept less money, but the only other option would be to foreclose, making for a lower, more alluring sale price.
What is For Sale By Owner (FSBO)?
For sale by owner means that the owner has chosen to sell the property without a listing agent. Usually, sellers like this option because a listing agent typically earns a 3-6% commission on the total price of the property. By selling the property themselves, the owner avoids paying this fee to a realtor. FSBO can mean big savings for the seller, but usually not for the buyer. If you are looking to purchase a home that is FSBO, then you should do your research to see how fair the listing price is. It would also be wise to make comparisons to similar properties in the area, as well as inspect the home. From there, you can make an offer and negotiate accordingly.