As an Exclusive Buyer Agent, I frown upon lease/purchase agreements for two reasons:
- Very few wind up closing, giving the Seller a large lump sum option payment.
- The home buyer is not going to be in a strong negotiating/bargaining position for any lease/purchase.
But if a home Buyer really, really wants the house (which impatience never helped a homeowner) and is otherwise unable to proceed with mortgage financing to purchase a house but just needs a little time to be in a better financial position to purchase a house (for credit repair; short on down payment; owns a primary residence; plans to move without selling, etc), then the Buyer and Seller may agree to a rental period with subsequent property purchase. In other words, a lease/purchase of a home.
Typically this involves:
- Rental to tenant (future Buyer) over a 12 month period, agreeing to a sales price of the house 12 months from now;
- Large non-refundable down payment by the Buyer (Seller keeps it if house sale doesn’t close, or used as down payment if it closes);
- Portion of the “inflated” rent to be applied toward the purchase price of the home (refundable?);
- Basic responsibilities of the Buyer and Seller including responsibilities for insurance, utilities, repair to and maintenance of the house, compliance with subdivision HOA CCRs, etc,;
- Length of lease term is long enough to obtain financing
- Provisions where Seller receives monthly payments and Non refundable fee, yet fails to make mortgage payments and home forecloses before Lease-Purchase expires and home is to go to closing;
- Consult with Real Estate Attorney to draft and review contract regarding any other local, state, national Lease/Purchase laws in effect.
Lease Purchase Contracts – Factors Buyers & Sellers Consider
Not only do you need qualify as a renter with a credit and reference check (n from a vendor who investigates credit), but also you must qualify (income, credit score, amount for DP,etc,) for a mortgage loan (prequalification from a lender who will be working with Buyer throughout the process) down the road at the time of purchase.
A term long enough for Tenant/Buyer obtain financing; what level & type of insurance will you need (Seller has homeowners/renters coverage); if responsible for utilities, put in your name so you control payments & establish credit; provide proof of payment to Seller; and if you pay for repairs/improvements, outline how will they are treated by Seller (credit toward purchase price or off lease payment). Protect or reduce responsibilities before purchase.
Responsibility for utilities, repairs, and maintenance and ask for proof of payment; Frequency; access of visits during lease; Levels of insurance required by tenant and Seller.
Monthly Lease Payments
Competitive, low and apply as much as possible toward Purchase Price.
Enough to cover current mortgage payment and any projected repair if possible (difference can be applied to purchase price if closed), otherwise, it’s there for repairs.
Normal on rentals; should be refundable regardless whether you plan to use it toward down payment or not unless it covers legitimate repairs; and document move in and move out condition with Landlord.
Make it refundable after lease expiration net of repairs but after review property condition if property doesn’t close.
Tied to down payment; have money held in an escrow account and not Seller’s hands; and don’t make it “non-refundable” unless you can close.
Make non-refundable right away; you can apply toward price, but only if purchase closes.
Protect your up front option dollars if possible; make it non-refundable if only Buyer default and can’t fulfill closing; and be sure to incorporate regular Purchase and Lease Purchase contract contingencies.
Obtain the non-refundable option money as quick as possible; make fewest purchase contingencies; shortest due diligence possible; and limit any contract extensions.
Make it close to current prices or future trends if prices are falling and a better price may be down the road.
Make it as high as possible to cover loan amount and desired return not related to current market prices.
NOTE: Since the ultimate success or failure relies on the relative bargaining strength of all the parties and the Buyer’s ability to qualify as both a tenant and purchaser, this is not the complete list of factors to consider for all Lease/Purchase Agreements that would fit each individual situation. Use it as a guideline. Add or change concerns to fit your specific situation.
References to products and services are not a specific endorsement, but the user must perform their due diligence and investigate whether the product or service is right for them. I welcome any or all comments that would help others.