In today’s challenging real estate market, sellers may be forced to relocate before their home is sold and leave an empty house behind. Not only is this a financial burden, but empty homes are more difficult to sell and while finding a tenant is an option, this solution may cause problems if the renter does not take good care of the property. Similarly, there are buyers who are unable to purchase a home today, but who are good candidates in the long run. A solution for both of these parties may be a lease purchase arrangement in which the sellers lease their property to a buyer who is willing to purchase it within a mutually agreed upon time frame.
While there are many variations, most contracts specify that a percentage of the monthly lease goes towards the buyer’s down payment. Often, as well, sellers require the purchasers to put down a cash deposit, some or all of which may be non-refundable if they choose not to buy the property when the lease is up. Regardless, whether you are a buyer or a seller, your REALTOR® can help you take advantage of the benefits inherent in this kind of agreement.
From a seller’s perspective, a lease purchase offers a number of benefits, the most obvious being that it provides cash flow for a home which otherwise would remain empty. In addition, the purchaser is someone with a genuine interest in and commitment to the home who is therefore motivated to take good care of it in the interim. The agreement protects the seller by locking in a favorable price, and since in most cases a portion of the rent is credited towards the down payment, the monthly income is often greater than what it would have been in a conventional rental agreement.
On the down side for sellers, a lease purchase is not a definite sale, and the buyers may choose not to buy the home at the end of the agreed upon lease term. There may be several reasons, not the least of which is that they may just change their minds. Every home has its eccentricities. After someone lives there for awhile they become very familiar with these and may decide the home doesn’t suit them or they don’t like the neighbors or it is too far from work. Alternatively, they may just wander into a Sunday open house and find a house they like better.
The buyer may also fail to qualify for a mortgage. Buyers who enter into lease purchase agreements may be strong candidates waiting for a previous home to sell, or perhaps they are young professionals with good credit but little cash. On the other hand they may seek this kind of agreement because their credit is weak and, though well-intended, may underestimate their ability to either improve it before the agreement expires or to save sufficient funds to actually make the purchase. To protect themselves, sellers can request a letter from the buyers’ mortgage company supporting their ability to obtain a mortgage when the time comes. To decrease the risk of a buyer pulling out of the deal for trivial reasons, sellers can require a deposit and stipulate that some or all of the money is non-refundable.
From the buyer’s perspective, a lease purchase makes it possible for someone who is unable to obtain a mortgage to find a home they like and start settling in. While lack of funds may be the reason they can’t buy now, another possibility is that they have minor credit glitches and are willing to repair them, but need time to do so. Many lenders will work with good candidates and help them straighten out their affairs so they can qualify for a loan. For such an individual, the lease purchase agreement permits them to lock in a price and start building equity even before they are actually owners.
On the down side, if buyers are required to make a non-refundable deposit, they run the risk of losing those funds should they be unable to exercise the purchase option at the end of the lease. Similarly, they lose any money they pay monthly that is above and beyond what would have been required had they entered into a conventional rental agreement. Finally, buyers should be aware that some sellers intentionally structure agreements to make it easy for them to nullify the contract (and keep the deposit) should a monthly payment be late or in the event prices begin to rise and they can increase their profit by selling the home to someone else.
Celeste Smucker is a writer, editor and author of Sold on Me Daily Inspiration for Real Estate Agents. She lives near Charlottesville.