Home Buying in 92821>Question Details

Lori, Home Buyer in 92821

is there such a thing as a lease-purchase option anymore?

Asked by Lori, 92821 Wed Apr 13, 2011

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16
Of course there are. (Except in Texas, where they're severely limited . . . though there are similar techniques that can be used.)

Read Dp2's comments. That's his specialty.

Otherwise, there's a lot of questionable material below.

STATEMENT: "not really recommended due to the fact that you have to put up Option Money that is non-refundable should you choose to NOT exercise your option to purchase."
CORRECTION: I'm not sure who says they're "not really recommended," except for the person making the statement and a few others below. It's true that the option fee generally is not refundable--though even that's negotiable. But remember: The option fee is paid to "purchase" the option--to give the tenant-buyer the right to buy. If the TB chooses not to buy, he/she still has had that right.

STATEMENT: "The issue can be that you & the owner state today that you have the option to buy the house for $300K, then 1yr from now the house won't appraise for $300K, it appraises for even $290K, the owner CAN say, "our agreement was for $300K, I'm not going to sell, I'm just going to keep you option money"."
CORRECTION: That one's true. So that's why your option agreement takes that contingency into consideration. It could state that, in the event the appraisal is low, that the option is extended for another x number of years. Or it could state that the sales price will be reduced to the appraisal amount. Or it could state that, in that event, the option fee is refunded. A low appraisal doesn't have to be a problem if the option agreement provides a method for dealing with it up front.

And here's another point: The tenant-buyer just saved $10,000 (minus any option fee) by NOT buying up front. Say he/she bought at $300,000 and a year later the property's only worth $290,000. And let's say the tenant-buyer paid a $2,000 option fee. Well, which would you choose: A $2,000 loss or a $10,000 loss? Neither is enjoyable, but the answer's a no-brainer.

STATEMENT: "put a clause in your lease agreement that simply states "Tenant has FIRST RIGHT OF REFUSAL" should the owner wish to sell the property anytime during the lease term". "
CORRECTION: You could do that. But why not do it the better way and construct a lease-option? The owner has as much right to request a fee for that concession in a lease as for an option fee in a lease-option. Further, in a lease-option typically (though it's all negotiable) a portion of the rent is credited to the purchase price. Under a first right of refusal, there's no such provision--no such benefit to the tenant-buyer.

STATEMENT: "ask for the "right of first refusal"...which means the landlord will come to you first, before selling to someone else. The sale price will be negotiated at that time. That, in my opinion, is the best way to go."
CORRECTION: That is one way to go. However, a lot of tenant-buyers entering into lease-options want to know what the price will be. They don't want it open-ended; they have no ideal whether they'll be able to afford the property. They want to lock in a secure price, one they know (or think they know) they'll be able to handle in a few years.

STATEMENT: "in my opinion in this declining market here in AZ favor the seller."
CORRECTION: They actually favor the buyer. Lease-options give tenant-buyers the RIGHT but not the OBLIGATION to purchase. If prices decline, the buyer always has the option of walking away at the end of the lease. However, if it makes financial sense, the buyer exercises the option and the owner has the OBLIGATION to sell the property. Another comment below says, "consulting an attorney is never a bad thing." True, but listening to them isn't always a good thing. When I went to one attorney to have my lease-option paperwork reviewed, he said he didn't like lease-options. Why not? Precisely because they were unilateral agreements: They bound the owner to selling (if requested), but did not bind the tenant-buyer to buying. Well, duh. That's precisely the point. Still, I agree with Dp2: " I strongly recommend that one consult with a real-estate attorney who has experience structuring these kinds of deals." And that's the key--an attorney with experience in structuring such deals.
2 votes Thank Flag Link Thu Apr 14, 2011
Don Tepper, Real Estate Pro in Fairfax, VA
MVP'08
Contact
Lease-purchase options are the highest litigated real estate transactions.
2 votes Thank Flag Link Thu Apr 14, 2011
Please don't misconstrue any of my comments below to be legal advice--it's not.

Lease-options and lease-purchases still exist, and they can be a great solution for some when structured properly. There's no need to request a "first right of refusal" for a properly structured (and recorded) option. An option already gives the optionee (or option holder) equitable interest in a property. (Please consult with a real-estate attorney for a more detailed explanation of equitable interest doctrine, and how that applies for an option.)

Some people erroneously malign lease-options (and other forms of creative financing) based upon the negative experiences of a few individuals. Creative financing is another tool; it's basically another form of financing. Just as one wouldn't condemn all conventional loans based on some bad testimonies, one also shouldn't condemn all deals with creative financing similarly.

One needs to make sure that one fully understands what's all involved before entering such an arrangement. I strongly recommend that one consult with a real-estate attorney who has experience structuring these kinds of deals. I also strongly recommend that one close these kinds of deals using an escrow company. Most--if not all--of the bad testimonies share the common flaw: the tenant/buyer didn't consult with a real-estate attorney, and didn't close the deal using an escrow company.

I invest in OC, and I use creative financing from time to time on deals. Most of what I know about equitable interest doctrine, I learned from some attorneys who practice in CA (and some other states). Wendy Patton, an investor and Realtor, teaches (and wrote a book) on how to properly structure these kinds of arrangements. You might want to check that out too.
1 vote Thank Flag Link Wed Apr 13, 2011
Officially? No. There are "Lease to Own" options out there still, but those must be arranged through a real estate attorney.

Hope that helps,

It's more than real estate. It's RAYL-Estate!

Brian Rayl, REALTOR®, e-PRO, SFR
Keller Williams Elite - Dallas, TX
972-949-4222
Brian@Rayl-Estate.com
http://brianrayl.com
Web Reference: http://brianrayl.com
1 vote Thank Flag Link Wed Apr 13, 2011
Debbie, although I also agree that everyone has a right to his/her opinion, I like Don's STATEMENT/CORRECTION style. I also agree with all of his points. While I get it that you don't like options (with non-refundable consideration), Don was correct IMHO to point out the logic flaw in that statement.

The flaw is the assumption that the option consideration is ALWAYS non-refundable--yet, that's not true. A tenant/buyer can negotiate that the option fee or a portion of it is refundable when working with a seller to set this up. I (and some other buyers) have also negotiated options with $0 for the option consideration with sellers, in exchange for giving them the right to continue marketing their property and go with a better offer.

The point here isn't to split hairs; rather, it's to ensure that we're all disseminating the correct info.
0 votes Thank Flag Link Wed Apr 27, 2011
I have seen many scams recently on Trulia where a company is taking a listing that has a notice of default on it from another agent and advertising it as a property lease-purchase option. Please stay away from any lease with a Notice of Default on it. There are charging fees to get info from them and it is a scam.
0 votes Thank Flag Link Thu Apr 14, 2011
I have seen many scams recently on Trulia where a company is taking a listing that has a notice of default on it from another agent and advertising it as a property lease-purchase option. Please stay away from any lease with a Notice of Default on it. There are charging fees to get info from them and it is a scam.
0 votes Thank Flag Link Thu Apr 14, 2011
Don, just to clarify something.....when someone states "In MY Opinion" - there is no need to list YOUR opinion as a "CORRECTION" as you did in several instances below.. You are free to disagree with an opinion, certainly, but it doesn't make that opinion wrong...as it is an opinion, and not stated as a fact.

In my opinion, means there might be other opinions, and the view expressed is just that person's thought on the subject, neither right nor wrong.......nor the end-all answer to the question.

I stand behind MY OPINION that agreeing to a set purchase price a year in advance in this volatile market is not what I would recommend when the option money would be foreited if the option isn't exercised.
I, of course, would also strongly recommend that anyone speak with a real estate attorney to discuss it in detail, to fully understand it , and to structure it....in northern NJ we use attorneys for our closings, so that would be a part of the process already.

When buyers have brought up the subject of "lease options" , many of the buyers I spoke to had no idea that it usually involved non-refundable option money - that they were paying for that option...........once that was explained, they didn't want to go that route.
Many consumers (those I spoke to) also erroneously thought, or assumed, that all their rent paid would be applied to the purchase price.......as I stated, there are a number of misconceptions (based on my exprience) on the consumer's side regarding lease options.....these need to be clarified before anyone embarks on that avenue.
0 votes Thank Flag Link Thu Apr 14, 2011
Yes, there are & leases in my opinion in this declining market here in AZ favor the seller. Best of luck.
0 votes Thank Flag Link Thu Apr 14, 2011
Hi Lori!

Most people don't really understand what a lease with option to buy means.....specifically, that it means non refundable money will be given upfront, and, more importantly, a sale price will be decided upfront, too.

I don't think this is a good idea.

If you want the option to POSSIBLY buy the home.....and you need a down payment, then simply put money aside each month, as the lease progresses.

Sometimes, the tenant will pay a amount over the fair market rent, and that overage will then be credited towards the sale price if the tenant does buy the home...........however, if they don't exercise their option to buy the home, the additional money is usually forfeited.
In this volatile market - why would anyone want to decide a sale price a year in advance?

As mentioned below - ask for the "right of first refusal"...which means the landlord will come to you first, before selling to someone else. The sale price will be negotiated at that time.
That, in my opinion, is the best way to go

Best wishes.......
Debbie Rose
Prudential NJ Properties
0 votes Thank Flag Link Wed Apr 13, 2011
There is but it's highly uncommon, especially in SoCal. If you're interested in renting before purchasing, you can reserve the right to have the Seller ask you first should they decide to sell but that doesn't bind you into buying that particular home. If you're thinking about buying, you should really look at the stats for housing prices and interest rates versus rents. Since July 2006, housing prices have decreased month over month (though the last year the drop has gotten considerably smaller) and rents have increased month over month. Just something to consider if you're weighing your options.
0 votes Thank Flag Link Wed Apr 13, 2011
Web Reference: http://BobPhillips.net
0 votes Thank Flag Link Wed Apr 13, 2011
Yes Lori, there is a lease option to buy/purchase and a realtor can do this. In a lease option to buy you would negotiate the price of the home now and would pay say $10,000 non refundable deposit to the owner. The
downfall is the price could go down,
you may change your mind about
buying this home and you would lose the deposit which is non refundable.
The upside is the home could go up
in price and you would get a good
deal. What other questions do you
have about it? Ingrid ski realtor.
OCAreaHomes@Gmail.com. Thank
you Lori for your inquiry
0 votes Thank Flag Link Wed Apr 13, 2011
Maybe in Texas you need a lawyer for lease option deals, but not in California. Of course, consulting an attorney is never a bad thing.

Lease options are an option, but not really recommended due to the fact that you have to put up Option Money that is non-refundable should you choose to NOT exercise your option to purchase. The issue can be that you & the owner state today that you have the option to buy the house for $300K, then 1yr from now the house won't appraise for $300K, it appraises for even $290K, the owner CAN say, "our agreement was for $300K, I'm not going to sell, I'm just going to keep you option money".

What you should do, if you're not quite ready to buy yet, is get into a lease, and put a clause in your lease agreement that simply states "Tenant has FIRST RIGHT OF REFUSAL" should the owner wish to sell the property anytime during the lease term". This means you get first dibs & you didn't lose any option money.

EmilyKnell1@yahoo.com
562-430-3053 cell
Realtor Since 1996
0 votes Thank Flag Link Wed Apr 13, 2011
Web Reference: http://BobPhillips.net
0 votes Thank Flag Link Wed Apr 13, 2011
Hi Lori. This subject pops up about once every week or two, so you might search the archives to see those other threads. Most of them have some pretty good suggestions, as to the pros and cons of such a transaction.

Here's the link to a recent one:

http://www.trulia.com/voices/Home_Buying/Need_help_First_tim…
Web Reference: http://BobPhillips.net
0 votes Thank Flag Link Wed Apr 13, 2011
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