Monday, February 6, 2012
Those Darn Lease-Purchases!
Every so often I get questions from buyers about doing a Lease/Purchase. A buyer client asked how it works, so I thought I'd address it again.
Many times buyers think that a Lease/Purchase and a Lease/Option are one and the same. They are not. A Lease/Option is a regular lease. At the end of the lease, the owner/seller, if he/she so chooses to sell the property, gives the first opportunity to the tenant/buyer to buy it. No money is paid to the seller as a down payment, and no monies paid as rent is applied to the purchase price.
The benefit of this type of agreement is that is "holds" the house for the tenant, IF the seller/owner is satisfied with their payment history. It allows for the tenant to save up money for a down payment, and it allows for the tenant to 'experience' what is wrong with the house while living there. Under this situation, the owner/seller/landlord is still responsible for all repairs and maintenance, something that will end once the buyer/tenant purchases the property.
A Lease/Purchase, on the other hand, is a Purchase and Sale Agreement that is already in place, but the closing is in the future (usually six to 12 months away), and the terms are altered in favor of the seller/owner. Since this is a risky transaction for the seller, much more is required of the buyer. In addition, the buyer must KEEP UP the house as if it is their own property. Things such as a dishwasher breakdown has to be repaired by the buyer. A leaky faucet must be repaired by the buyer as well. But since this is still a lease, the seller/owner still has the right to inspect the property at reasonable hours with reasonable notice.
Most times, there is a larger down payment for a Lease/Purchase than a buyer would make in a normal sale. This down payment is anywhere from $5000 to 20% of the purchase price. Most times, it is NON-REFUNDABLE to the buyer should the buyer be unable to secure financing. Part of the rent may or may not be applied toward the purchase price. That amount may be as small as $100 or as much as 50%-75% of the rent amount. Most of the time, owner will not apply a large portion of the rent to the down payment because of what they owe on the property.
Both of these situations are used when the buyer has impaired credit. Credit can be affected by a number of things such as a bankruptcy, previous short sale, debt that they cannot repay due to medical bills or other high debt, etc. And because of risk, sellers will usually only sell at "their" price, which is usually the list price of the house.
Sometimes sellers agree to a Lease/Purchase or a Lease/Option because they are soft-hearted and want to help out their fellow man. Other times, sellers who engage in Lease/Purchase agreements do so expecting the buyers to loose their down payment.
Lease/Options and Lease/Purchases are different from Owner Financing. Sometimes Owners will finance a purchase. The closing occurs just like in a mortgage lender-backed situation (typically 30-45 days). Owners typically amortize (base payments on) 30 years (360 months), but may require the buyer to refinance the house within 36 months of the sale.
Lease/Purchases, Lease/Options, and Owner Financing are sometimes tricky. You'll need a good agent to help you with those, whether buying or selling.