msbean79, Home Buyer in Chattanooga, TN

would you consider doing a rent to own on this house, for the same amount as the estimated price?

Asked by msbean79, Chattanooga, TN Sat Sep 15, 2012

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In my opinion Lease-Purchase Agreement (LPA) is a more appropriate terminology as Lease versus Renting conveys the significance of the arrangement more accurately.

Lease-Purchase bears certain risks and offers benefits to both parties. As with any business arrangement, the success of the agreement relies on the validity and comprehensive nature of the contract, the durability and reliability of the participants to the agreement, and the circumstances and intent the agreement is arranged. It is well adivsed not to attempt to cut corners with do-it-yourself forms, avoiding contracts or the advise of qualified professionals familiar with LPAs. This includes an attorney, accountant, financial planner, or banker, and a real estate agent.

Often LPA are established from an existing relationship (such as a tenant-landlord) in which a pay and tenant history is establihed and the desire or opportunity to sell the property arises. It also requites the property owner to be willing to assume risk as a mortgagee.

Benefits to the Purchaser/Tenent-
LPAs may offer the opportuntity to aquire ownership to a tenant who may not be able to acquire conventional or conforming financing. Often the cost of LPAs can avoid or reduce certain costs associated with mortgage financing and real estate agent broker fees. Financially, the tenant retains the benefits from investments in any home improvement if the contract is executed fully. Another benefit is the tenant is already familiar with the property and does not have to search and or move. Upon satisfaction of the agreement, the tenant becomes the purchaser and obtains ownership of the home and the payments made contributed to their net worth.

Benefits to the Seller/Property Owner-
As a mortgagor the seller essentially annuitizes the value of the property receiving a scheduled monthly income for the period of the contract. This may be a beneficial tax or financial planning strategy. As a property owner the secured interest of the tenant / buyer may eliminate the risk of excessive wear and tear and repair costs. The tenant bears the expense of repairs and therefor more likely to treat the property as their own.

Risks are inherent with LPAs-
This risks can partially be mitigated with a well thought out contractual agreement and due diligence. It should be understood that the buyer / tenant in most circumstances bears the risk of loss of capital investment. Seldom have I seen the return of any investment or payments to the improvement of property in agreements with disintretested (not family related) parties.

Costs associated LPAs
Often people mistakenly assume that an LPA will avoid closing costs. Having independent real estate or legal representation in the interest of both parties is recommended. There are fees associated with the drafting of a valid enforceable legal contract compliant with the state or district laws. The agreement and mortgage note have to be filed at the county court house. Title examination and insurance is important to protect the buyer's interest and protect against an unforsean claim on the property that pre-empts the purchaser's interest. Inspections of the property to help the buyer make a well informed decision about the agreement. Upon the satisfactory completion of the agreement transfer of the deed of trust are filed at the county court house.

When LPAs work they work they work well for both parties as long as their interests remain durable and needs or goals do not change contrary to the established agreement. When LPAs go wrong or the document drafted can be easily litigated such arrangements have been know to be costly and troublesome.

My choice would be to obtain conventional or conforming financing on a qualified property in lieu of an LPA. The establishment of ownership is finite and the mutual risk is mitigated. I would consider LPA only in a circumstance with special circumstances or if I were willing to assume the risk as a mortgagee and both parties had the ways and means to enter the agreement properly with the proper due diligence.
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