Look very carefully before grabbing no-money-down deal


November 18, 1990|By KENNETH HARNEY | KENNETH HARNEY,Washington Post Writers Group

WASHINGTON -- With money tight and first-time homebuyers worried about recession and the Persian Gulf, aggressive real estate marketers are introducing 1990s versions of creative financing: Nothing down. No closing costs. No transfer taxes.

Plus new variations on the "lease-with-option-to-buy" concept, HTC including "reverse lease-options."

Discussions with homebuilders, real estate agents and individual home sellers in major markets suggest that tough times are producing a bumper crop of innovative deals.

Here's just a sample, with some practical advice for consumers before they sign on the dotted line.

Outside Baltimore, condos are selling like hot cakes at a 330-unit project called The Gardens at Owings Mills.

The financing terms are hard to refuse: No down payment whatsoever -- 100 percent financing provided by an FDIC-insured bank. No closing costs -- they're all paid by the developer. No mortgage "points," fees or transfer taxes. And your 30-year loan carries a 7 percent payment rate in the first year, 8 percent in the next and 9 percent in the third. Only in the fourth year does it turn into an adjustable-rate mortgage, with regular annual and lifetime rate caps.

Tina Bonney, president of Boston-based Universal Brokerage Services, the marketer for the Owings Mills project, says she's signed sales contracts on 30 units in the past two weeks alone. "We are trying to deal with the fears that we see in [first-time] buyers' eyes," she told me.

Many middle-income renters, according to Bonney, are ready and eager to buy a home. But they're grappling with two hard facts this fall. First, the $3,000, $5,000 or more they've managed to save in the bank over the past couple of years barely scratches the surface of most starter-home down-payment and closing-cost packages.

Second, with recession looming, these would-be buyers ask themselves: Isn't this a risky time to take all our savings and put them into a home purchase? We end up with no savings and higher monthly expenses at the worst time imaginable -- the start of a national economic downturn.

To "move inventory" in the face of such legitimate concerns, Bonney says, the developer and a commercial bank came up with the nothing-down, no-costs concept. The only out-of-pocket payment required from purchasers is a two-month "prepaid reserve fund" for the condo association. The maximum charge for that, according to Bonney, is $223.

A second, increasingly popular way to turn tenants into homeowners across the country this fall is variations on the rent-with-option-to-buy plan. Typical of the programs in the market is one being used at Prospect Towers, a 192-unit condominium in East Orange, N.J. The project allows you buy a three-bedroom unit for $99,000 to $115,000, or to move in on a lease-option.

Under the option deal, you pay regular rent of $1,000 to $1,100 a month on the unit for up to a year. Any time during the 12 months, you can buy at the original price, get an attractive mortgage and have three months' rent credited to your down payment.

Potential buyers confronting such deals should keep these pointers in mind:

* Kick the tires especially hard. Developers don't give away condos. Banks don't give away money. The financing incentives almost certainly take the place of price reductions on the units.

* Check out the developer, the property, its history and physical condition with extra care. When condos need to be moved fast, they may have deferred-maintenance and other problems that excited buyers discover too late.

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