Home Selling in Salisbury>Question Details

Lolly, Home Seller in Salisbury, NC

What are the pros and cons to lease purchase?

Asked by Lolly, Salisbury, NC Mon Jan 9, 2012

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Please see my answer above under "rent to own". I go into this in some detail.
0 votes Thank Flag Link Tue Jan 10, 2012
Lolly, great question and as a SELLER there is a lot you must know and be prepared for.

PROS:
1. You make a whole lot of money
2. Someone else will be paying the bills for your house
3. You are able to retain controlling interest in property. (contract structure is important)
4. Buys time until market improves
5. Opens home to larger buyer market
6. If number 1 is not your priority, property structured you can be of significant help to a new owner.
7. Your CPA will show you how to convert to 2% CD, your 1% bank savings account or 4% IRA into a 12% retirement account'
8. 80% upside down can turn into a positive cash flow.

Cons
1. You remain connected to the property
2. You may need to foreclose (depends on structure)
3. You will need the services of an attorney
4. You will need to consult your CPA.
5. You may need to check on your real estate occasionally
6. That pile of cash you may have been hoping for (sold) will need to be deferred until the contract matures.

Lease purchase/Leas options can be beneficial or extremely predatory. The opportunity to make unconscionable amount of money turns most into predatory situations. It does not have to be this way. Unfortunately, too many BUYERS seeking this situation are UNQUALIFIED to buy a home and will not be qualified in the foreseeable future. Impatience is a expensive attribute, and most certainly comes at a great cost to these citizens. This is an environment for great abuse or benefit. I wish more chose the high road.
0 votes Thank Flag Link Tue Jan 10, 2012
Having sold real estate full time for over twenty years I've been asked about lease to own by Buyers countless times, you may be the first Seller to pose the questions.

I have personally never seen a lease to own ever be more than a lease. 99% of all the people who ask this question do so because they believe it enhances their stature with the Seller and 99% of those asking have no real idea what this actually means. When questioned they tell me their expectation is that their rent will be applied against the purchase price as if you or any other Seller would permit or could afford to have them occupy their home for a year or two for nothing.

If you choose to lease to own, you will need to assume the role of a mortgage lender, including doing a complete investigation into the credit worthiness of the potential buyer. You will need to agree on a purchase price and have a contract put into place which should include a substantial non-refundable "lease option payment" to be paid at the time the contract is signed. This is not rent, it's upfront money that will be forfeit by the buyer should they fail to perform (I.E. buy the house as the contract stipulates.) You'll need to figure out what it's going to cost you to carry the home, (taxes, insurance, mortgage payment etc) and realize that this is your base rent amount. If you credit any portion of this amount to the Buyer as part of their down payment you're losing money. Most lease options I've drawn up (remember what I said none has ever been more than a lease) use a sliding scale. In other words let's say you're willing to credit 100% of the monthly rent towards the down payment if they close within the first 90 days. Perhaps you might only credit 70% if the close between day 91 and 180, 50% if they close between day 181 and 270 and 25% if they close between day 271 and 365. The objective is to reward them for closing quickly. The only reason someone should enter into an agreement like this with you is because they believe they will have the available funds in a relatively short defined period with which to buy. (Perhaps their expecting a settlement, an inheritance, their home to sell etc) If they close then the lease option money you took up front would typically be credited against their purchase price as well, if not they forfeit it.

Finally you have to assume the role of landlord, which bring a host of other potential issues.

Hope this helps you as you consider your options.
0 votes Thank Flag Link Tue Jan 10, 2012
Having sold real estate full time for over twenty years I've been asked about lease to own by Buyers countless times, you may be the first Seller to pose the questions.

I have personally never seen a lease to own ever be more than a lease. 99% of all the people who ask this question do so because they believe it enhances their stature with the Seller and 99% of those asking have no real idea what this actually means. When questioned they tell me their expectation is that their rent will be applied against the purchase price as if you or any other Seller would permit or could afford to have them occupy their home for a year or two for nothing.

If you choose to lease to own, you will need to assume the role of a mortgage lender, including doing a complete investigation into the credit worthiness of the potential buyer. You will need to agree on a purchase price and have a contract put into place which should include a substantial non-refundable "lease option payment" to be paid at the time the contract is signed. This is not rent, it's upfront money that will be forfeit by the buyer should they fail to perform (I.E. buy the house as the contract stipulates.) You'll need to figure out what it's going to cost you to carry the home, (taxes, insurance, mortgage payment etc) and realize that this is your base rent amount. If you credit any portion of this amount to the Buyer as part of their down payment you're losing money. Most lease options I've drawn up (remember what I said none has ever been more than a lease) use a sliding scale. In other words let's say you're willing to credit 100% of the monthly rent towards the down payment if they close within the first 90 days. Perhaps you might only credit 70% if the close between day 91 and 180, 50% if they close between day 181 and 270 and 25% if they close between day 271 and 365. The objective is to reward them for closing quickly. The only reason someone should enter into an agreement like this with you is because they believe they will have the available funds in a relatively short defined period with which to buy. (Perhaps their expecting a settlement, an inheritance, their home to sell etc) If they close then the lease option money you took up front would typically be credited against their purchase price as well, if not they forfeit it.

Finally you have to assume the role of landlord, which bring a host of other potential issues.

Hope this helps you as you consider your options.
0 votes Thank Flag Link Tue Jan 10, 2012
Generally we don't see a lot of 'lease/purchases' working. Once the lessee gets into the place they start discovering things they don't like about it or start seeing homes that they feel might be a bit better. Remember as a lease purchase you only have a small percentage of the market to choose from but there are a lot of homes out there for sale. And so the 'purchaser' starts looking around comparing homes.
Meanwhile
The seller could be watching the market, if its climbing and they have agreed on a sale price (or right of first refusal but no price agreed to in advance) they may decide the price was too low that the tenant wanted to pay, so will turn to the tenant and ask for more or refuse to sell it. Hopefully their contract allows that, it would not be smart for the seller to do anything other than that.
A tenant thinks they are putting money away each month from the rent for an option to purchase, the landlord makes more. The deal might not work however the tenant has been paying more in rent. Those are the basics.
Hope that helps
0 votes Thank Flag Link Tue Jan 10, 2012
As a seller, I'd imagine the pros would be in the ability to generate rent/revenue on a property that would be selling in a market now where supply of homes is high and prices are low. Assuming you can find a seller promptly. (Always check with your Realtor for information and a Comparable Market Analysis and average days on market so that you can make the best decision for yourself)

If your house isn't 'ready' to sell at this time and you like the option of becoming an investor....it's a great way to get started perhaps. A good long term tenant can enhance the bottom line.

The current economic climate has led to a larger than normal # of people who need to rent and can't afford to buy. Find a reliable tenant and you are going to be happy. (maybe*)

Check with your tax advisor about the possible tax/income/implications to rental properties. Schedule E's and depreciation can be beneficial if you plan properly and these things fit your needs.

Some cons are that you as the owner run the risk that your tenant/prospect may not execute the purchase at the end of the terms. In the process they could do some long term damage to your property that could cost a lot more than it is worth.

Maybe you have trouble finding a good management co./tax advisor/tenant and/or you aren't ready/prepared to take on the additional risk/liabilities and headaches.

Executing the purchase option isn't a guarantee but a contingency that runs a higher risk than selling.

It's really a tough call but weigh the factors most important to you and go for it....
0 votes Thank Flag Link Mon Jan 9, 2012
The cons include - but are not limited to - you risk overpaying for the property in order to get favorable terms, and then the owner/seller doesn't keep the payments current so they get foreclosed upon, leaving you in the lurch.
0 votes Thank Flag Link Mon Jan 9, 2012
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