In today’s difficult real estate market, a once ubiquitous tool has made a return; the lease purchase. Consider it a hybrid alternative to either buying or renting. There is no doubt that in many parts of the country renting is not only more popular, but may truly be a wiser option than buying today. Each time the experts tell us that home prices can not go any lower, they do just that. What if you want to be a renter for now, but keep the door open to owning at some point in the near future? If this describes your predicament, you may be the perfect candidate for a lease purchase option.
How Does A Lease Purchase Work?
The arrangement can be a win-win for both landlord (seller) and tenant (buyer). What if you are new on your job or have recently started a business? Maybe you lost a home to foreclosure or had another financial setback that would make it impossible for you to currently obtain mortgage financing. Any of these reasons would make a lease purchase a viable option for you to consider.
A lease purchase would allow you to rent a property for a specified period of time and give you the right to purchase it at an agreed on price later. The timeframe can vary, but it is very common for such arrangements to be 3 to 5 years in length. You may even be able to have a portion of your rent counted as a credit toward buying. For example, if you pay $1,200 monthly rent, $200 could be agreed to as a credit toward the purchase. This would mean that in five years you would have accumulated $12,000 as a purchase credit.
If the agreed on purchase price is $150,000 and the property increases in value to $175,000 you also have $25,000 in equity. Add that to your $12,000 in purchase credit and you have a down payment of $37,000! Yes, this amount would actually be viewed as a legitimate down payment by the mortgage lender. I have been a party to several of these transactions as a buyer, seller, mortgage broker, and real estate broker. The concept works very well.
The Downside Of A Lease Purchase
It all sounds so great, what can go wrong? Quite a bit. First and foremost, you need to make sure that the owner is making the monthly mortgage payment. If they default on the mortgage, your option to buy and any equity you may have in the property will disappear over night. You can require the seller to provide you proof monthly that the mortgage is being paid. You can also go online and look up the property in your county records to uncover any legal filings against the property (a good idea to check every month). Keep in mind that you are still just a renter until you actually purchase the property. I have had sellers try and change the deal on me after the value of the property increased dramatically. I can truly say that for the most part my experience with lease options has been positive.
The Difference Between A Lease Purchase And A Lease Option
A lease purchase is an agreement that requires you to buy, while a lease option provides the right to buy but not the obligation. The better arrangement is clearly the lease option, giving you the ability to walk away if you decide that you don’t want to exercise your purchase option. If you have a good attorney, you can also add some escape clauses to a lease purchase that will give you additional ways to cancel the purchase. Of course, I am not suggesting that you deceive anyone but everything on an arrangement like this is up for negotiation. The best scenario is to have the option to buy but not the obligation. If you end up not making the purchase, it would be likely in most agreements that you would concede any purchase credit or equity you have accumulated in the property.
An Excellent Option For Sellers
I receive countless e mails throughout the week from individuals that simply can not find a buyer for their home. They have continually lowered the price but there are no buyers. I am convinced that this is due to the lack of mortgage financing that is currently available. To get a mortgage in today’s strict lending environment requires a very high credit score and a sizeable down payment. This has reduced the pool of buyers down to the lowest levels we have seen in recent history. Of course, there are cash buyers out there but they are as prevalent as unicorns. If you have a house that you can not sell, consider marketing it as a lease option. I have sold houses using this method and find that the tenant takes much better care of the property (no doubt since they are hoping to buy it some day). By allowing a portion of the monthly rent to be a credit toward purchasing, I am able to collect more than enough rent to cover the underlying mortgage and other overhead of the property. If the renter does not end up buying the property in the end, I have at least bought myself some time and covered my expenses in the meantime.
Need Some More Information On This Topic?
Wendy Patton is considered a leading expert on lease purchase real estate and her website offers quite a great deal of insight on the topic. I don’t know Wendy but have used her materials and they have been quite helpful for me. She also has a book available through Amazon on lease option real estate.
If you have ever bought or sold through a lease option or lease purchase arrangement, please use the comments section below to share your experience.
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