Lease/Purchase
This article describes a situation in real estate where the buyer and seller want to kick the can of closing the deal down the road. It has pros and cons to consider for both parties, and we recommend engaging a real estate attorney specializing in Lease-to-own transactions as the statutes and rules change.
Sometimes a prospective tenant will ask about a lease with the option to buy. There are two factors that make this somewhat rare: There may be economic reasons that make it improbable to get a property into a lease option in a rising market. Why would a seller settle for today’s value to be paid in the future, if she could get a higher price in the future? Here’s how to make the landlord more motivated to do the lease option, and to make the renter more motivated to buy when it comes time to do so:. There are a few things the seller can do to encourage the tenant to exercise the option. First, the seller can demand a fairly large amount of option money. Since the tenant forfeits the option money if he fails to exercise the option, this provides a strong incentive to buy.
Similarly, the seller can require a higher-than-market rental rate for the property. This also increases the investment the tenant has in the property.
Prospective buyers should avoid lease/option agreements in markets where home prices are falling or seem likely to fall. If prices go down, the buyer will have paid for the right to buy the property for more than it is worth. The seller, like any other landlord, should review the prospective tenant’s credit report before committing to the agreement.
If you found a property and the seller agrees to a lease option, get the contract written by a lawyer! There is no simple form or contract template for this transaction. Every situation is going to be unique. While rare there is a perfect storm situation where this could be a win-win for the two parties, If you are looking to buy a home and your credit score is poor or you don’t have adequate funds for a down payment, your financing options may be limited. Obtaining a mortgage through traditional means can be difficult or even impossible. A lease-purchase contract is one alternative that may facilitate a purchase when the buyer cannot secure a mortgage from a lender. On the sellers’ side if the property is hard to sell or the market is tight you want to secure payments this is a way to fit your needs. While the effect of a lease/purchase is very similar to a lease/option, the act of signing a purchase contract may make the buyer/tenant more likely to complete the sale.
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The Basic Outline of a Lease Purchase
In a lease-purchase contract, the buyer and seller agree to a lease period followed by a property sale when the lease ends. This type of agreement combines both a lease and a purchase, with the tenant/buyer securing the option to purchase the house. The leaser pays a deposit at the outset in exchange for the subsequent option to purchase. The right to purchase the home at the end of the lease belongs to the leaser. Part of the rent is used for a down payment later on, but the renter is responsible for securing financing for the purchase once the lease ends.
The reasoning for a Buyer
A lease purchase provides a means to buy a loft or home if the buyer cannot obtain a mortgage. The renter can use the time during the lease phase to improve his credit score prior while locking in the goal of buying the loft or home. If the house increases in value during the lease period, the buyer also benefits from the additional equity. However, the leaser/buyer must make regular monthly payments. If he is having difficulty making a payment, the arrangement can be terminated by the seller. The buyer must also have some confidence that he will obtain financing at the end of the lease to purchase the home. If the renter fails to secure financing, he may lose the extra cash he paid toward a down payment.
Benefits for a Seller
A lease-purchase agreement may be attractive to a seller in a competitive market since she can lock in a buyer and secure a monthly payment. The seller is typically able to charge a higher rent than he would normally receive in a traditional lease. At the same time, a seller who wants access to a large sum of cash will not receive those funds in a lease purchase. If the value of the home increases once the lease has ended, the seller cannot realize the increase in value since the parties are generally locked into a purchase price. Of course, the biggest disadvantage is that lease-purchase agreements are multi-year contracts. This carries a certain degree of risk and uncertainty that many sellers may choose to avoid.
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Copyright © This free information provided courtesy L.A. Loft Blog and LAcondoInfo.com with information provided by Corey Chambers, Realty Source Inc, BRE#01889449 We are not associated with the homeowner’s association or developer. For more information, contact (213) 880-9910 or visit LAcondoInfo.com Licensed in California. All information provided is deemed reliable but is not guaranteed and should be independently verified. Properties subject to prior sale or rental. This is not a solicitation if buyer or seller is already under contract with another broker.