Home Selling in 98077>Question Details

Carissa Cast…, Home Buyer in Woodinville, WA

What to do when a lease to purchase buyer bails?

Asked by Carissa Castaldo, Woodinville, WA Fri Oct 5, 2012

We are sellers and our lease to purchase recently fell through. Our lessee found a cheaper home to buy, canceled the purchase contract and now wishes to end the lease part of the contract early. We have agreed to release him from the lease contract once we find another buyer for the home but he does not wish to pay rent moving forward even though his contract is through 1/31. We have decided to hold his earnest money from the purchase since it is nearly identical to the amount of the next 3 rent payments he is contractually obligated to pay. Since he made it clear that he was not willing to complete his lease contract as obligated, we felt this was our only way to protect ourselves financially. I know that in a lease to purchase deal the earnest money is tied to the purchase contract only and we may be wrong holding it, but we are not sure what other steps to take at this point. Advice?

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Your experience is more common than you might believe. With more than three decades of experience
I advise all sellers that when entering a lease to buy contract they need to understand it's a lease and nothing more. Personally I'e never once see a lease to own covert to a sale. I'm sure some have, bui statistically the likelihood is very low.

In your case the real issue is that your buyer/tenant is preparing to break their lease. I would advise them that should they do so you will notify the credit reporting agencies immediately as well as file a lien against the home their buying for the amount they owe you in rent plus any legal fees you incur. While you're willing to release them from their sales contract they need to settle up with you on the rent in order to be released from the lease without severely negative ramifications. I would suggest to them that they sign a release of the $3000 earnest money in lieu of the rent their obligated to pay you and remind them that you will be inspecting the house once they leave and that you expect it to be neat, and clean and in similar condition to when they first took occupancy and if it's nt that you will be chasing them in small claims court for these expenses.
1 vote Thank Flag Link Mon Oct 8, 2012
You should talk with an attorney as it depends on how the contract(s) were written. If you have a purchase agreement with a long closing, many months or years even, and a lease agreement as separate documents, you likely can't tie them together as you are contemplating doing.

Usually the Earnest Money would be forfeited if the buyer changes his mind about buying the house prior to closing, so I am not saying you can't keep the Earnest Money. But you likely can't call it rent. If he owes you rent...he owes you rent. If he owes you the Earnest Money...then he owes you both.

Again it depends on your agreement, but that is normally the case. I think if you check with an attorney you will be pleased with the end result. It just is better to double check the basis for not returning the money, as I think you may have that part incorrect. You would not normally be due the Earnest Money for rent issues. You would be due the Earnest Money because the buyer cancelled the purchase and sale agreement and likely agreed to "Forfeiture of Earnest Money" in the event he decided to renege on the contract. Depends who wrote the contract and how it is worded.

FYI the commonly tossed around statistic is that 50% of Lease Purchases fail, though more often because the buyer who couldn't get a mortgage to buy it in the first place...never can.
1 vote Thank Flag Link Fri Oct 5, 2012
Hi Carissa,

Lease Option contracts have a very high percentage of failure. Usually the earnest money in the purchase part of the lease purchase is non-refundable. But that totally depends on your specific contract. Deciding how to handle the earnest money is guided by the wording of the purchase and sale agreement part of your contract.

The lease payments are a separate issue. Hopefully you got first and last month lease payments plus a security deposit for the lease portion. Your lease contract will guide your choices here also.

Lease purchase is actually a good seller strategy because if the buyer / lessee decides not to move forward, you have their non-refundable earnest money and / or you still own the property. You can do another lease purchase, you can sell the property, or you can keep it as a long term rental, which is the best way to build wealth. You have lots of choices.

You received lease money for quite a few months and now the market has improved, so it is possibly a better time to sell than it was when you signed the lease. I sell in the Woodinville area and would be happy to meet with you for a no obligation consultation on your specific situation. I also work with investors

You can contact me at my web site, http://www.karenmcknight.com .

Warm Regards,
0 votes Thank Flag Link Tue Oct 9, 2012
Your options will be (or should be) clearly defined by the lease verbage. Those are your options.
0 votes Thank Flag Link Mon Oct 8, 2012
Can’t comment about what your contract allows or doesn’t, that depends on how it was written. I agree with Larry, I have closed thousands of purchase transactions, not one of them was a lease option. I would treat it the same way I would treat a tenant that broke the lease. I wrote a couple of posts on my blog looking at leas options from both the buyer’s and seller’s perspective, see below, good luck,

Jim Simms
NMLS # 6395
Financing Kentucky One Home at a Time
0 votes Thank Flag Link Mon Oct 8, 2012
Ardell provided exceptional guidance. Consult an attorney. Specifically the one you hired to prepare your lease documents.

Your initiative to make your home available via a lease to purchase is a very viable option in this environment, however, your safeguards need to be in place from day one, not via the courts and litigation.

From the position you are in, Larry's suggestions will provide you significant leverage for resolution, perhaps not immediate, but in the near future.

Best of success to you,
Annette Lawrence, Broker/Associate
Remax Realtec Group
0 votes Thank Flag Link Mon Oct 8, 2012
You should consult an attorney. Without knowing the specifics of the contract it is not possible to answer your question. In contracts in my area if the buyer decides to not go thru with the purchase the contract usually states that they forfeit their escrow and the seller gets to keep it.
0 votes Thank Flag Link Mon Oct 8, 2012
Based on your reply to Ben, I would guess that the $3000 was the payment for the purchase option, which would be non-refundable and not rent. Rent would be due for the term of the lease and if the option was exercised by the purchaser, the $3000 would then be applied as both earnest money and down payment.
Again, I'm guessing based strictly on how these usually work and without the benefit of the original documents. Without an attorney review of these however all we can do is guess.
0 votes Thank Flag Link Sun Oct 7, 2012
What is the exact wording on the contract re: the lease?
0 votes Thank Flag Link Sun Oct 7, 2012
You need to speak to an attorney to see if you can hold the earnest money. If you don't know one
I can recommend an attorney.
0 votes Thank Flag Link Sat Oct 6, 2012
We would appreciate a recommendation of a local real estate lawyer, thank you. Cdcnyc@yahoo.com
Flag Sat Oct 6, 2012
Did they pay for the option? Usually there is an amount paid for the option (I.e. $3000) and that is credited at close (in other words, it becomes part of the down payment). If they don't purchase, you just keep the money. Otherwise, you don't really have the right to keep the earnest money. You do have the right to collect rent or enforce any other penalties (like a early termination penalty) that was in the contract. You should have an attorney look at the contract and let you know what your options are.
0 votes Thank Flag Link Fri Oct 5, 2012
I am unsure of what you mean by them paying for this option. The earnest money was released to us (the sellers) when the contract was drafted last January, and it was clearly stated as non-refundable. They buyers did, however, give in a denial letter from a lender saying they were ineligible, but they already had another offer in on another home without notifying us.
Flag Fri Oct 5, 2012
I have warned a hundred buyers about doing a Lease/Option; these people must not have been one of them.

You are not only within your rights, but I am entirely on your side:

They knew what they were getting into.
0 votes Thank Flag Link Fri Oct 5, 2012
A lease to purchase is first and always a lease. If this was strictly a rental and a tenant wanted to exit early, they would be responsible for the remaining term of the lease or until you secured a new tenant. The "purchase" option will depend upon how your contract was prepared and you choose to enforce it. A well written Lease/purchase option would anticipate this and have clear consequences and protections. You probably should start be reviewing the agreement and if you are not sure, have it reviewed by the person who drafted it or an attorney.
0 votes Thank Flag Link Fri Oct 5, 2012
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