Why do we say Think Again? Lets examine things closely.
Buyers run a significant risk of entering into a Lease Purchase – How?:
- The Seller could take your rent payments and not make a single mortgage payment and the property could go into foreclosure. (Yes, this has happened)
- The Seller may not keep up with the property. (from repairs, to taxes and you name it)
- Any improvements the Buyers only benefit of the Seller, unless the Buyers actually close on the property.
- As they say, “life can get in the way” and one of the parties to the contract may not be able to perform.
Having said that, Buyers are more and more questioning the availability of this scenario because of the status of our economy.
Here are some seller risks you should be aware of:
The Buyers don’t have acceptable credit to buy today and hope that in the near future their credit will be better and they can qualify for a loan. Risk: How far off is the buyers’ credit from credit-worthy? Depending on the buyers’ situation, the buyer may not be able to cure their credit in time to buy the home. Then, the buyers cannot buy the house and the seller will have to clean up the house and prepare it for sale.
The Buyers have a home to sell. Risk: The buyers still haven’t sold their home at the end of the lease. If the buyers love the home and want to buy it, the best option is to reduce the list price on their current home and get it sold. Then, buy the new home.
The Buyers want to test out the neighborhood/house/city/etc. Risk: The Buyers are not committed to the new home. Even though they have entered into a binding purchase agreement, many Buyers think the Lease Purchase agreement is a Lease Option.
The Buyers think that some of their Lease payment will go toward the Purchase Price of the home. Risk: Though some Lease Purchases have a buy down provision, this is not true in most of the Lease Purchases that I have reviewed.
- If you feel you your only option is to enter into a Lease Purchase, please take heed of the following precautions:
- An attorney must create the Lease Purchase documentation. Our standard Realtor forms do not cover all the items that need to be addressed.
- Spell out very clearly what both parties expect at the end of the Lease Purchase.
- Use non-refundable earnest money to ensure that the intent is understood and the Seller is compensated if the Lease Purchase does not come to a close. Also, I believe the attorney should hold the monies AND collect the rents and pay the mortgage. Too often we have heard of the seller keeping the funds and no making payments. The home is foreclosed on and the buyer is out his/her money!
The Buyers should do their due diligence before they move in:
- Do an Inspection and Negotiate the Repairs. Determine in writing who will be responsible for repairs during the lease term.
- Examine the Title.
- Get an appraisal.
- Have the Seller buy a Home Warranty.
- Sellers should keep the home fully insured. Buyer should insure their contents.
- Neither Buyer nor Seller should make changes to the house during the lease term, unless negotiated by all parties.
Consider, Buyers and Sellers may simply consider signing a Lease with an Option to Purchase giving the buyer right of first refusal to buy the property at the end of the Lease. However, the buyer would not be obligated to buy the home.
Be sure to get an attorney involved to create the language necessary to protect both buyers and sellers with any options involving a Lease Purchase.
