Home Buying in Michigan>Question Details

Kim P, Home Buyer in Lansing, MI

How to make offer on lease option home-Buyer's Agent Hasn't Been Helpful!?

Asked by Kim P, Lansing, MI Sun Jun 1, 2008

I have found a home I want to make an offer on that is lease option to purchase. I need about a year to get my credit corrected, and this is my best option at this time. My buyer's agent doesn't know a whole lot about this obviously, I think I know more than her, but she keeps telling me that to put an offer on a lease option home I have to have earnest money. I know I don't, that's what the lease option down is, right? Can anyone give me a step by step: 1. make an offer-fill out xyz forms, submit to sellers agent, 2. counter-offer, etc. so that I know what I need to be doing and can correct her when she's telling me inaccurate information? When does the downpayment get made? When the final papers are signed & I move in right? Any help right now would be GREATLY appreciated! :) (I'm in Michigan)

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There's a mix of some pretty good and some not-so-good information below.

To answer your specific questions, both above and in your follow-up question:

The initial "sounding out" can be done verbally. However, everything ultimately must be committed to writing--the lease, the option, and various other documents not mentioned below.

When I make a lease-option offer to an owner (and I do it directly), it's often to someone who is trying to rent their home. But it could as easily be to someone trying to sell. You'll already have a sense of what they're after dollars-wise. If it's for sale, you know what they're hoping to get. If it's for rent, you also know. The basic pitch is: "You home sounds very nice. Would you be interested in leasing your house to me for a while--a year or two--allowing me the right to buy your house at the end of the lease?"

You talk this through--find out what they want for a lease and a purchase. You also find out how much they'd be willing to credit you toward the purchase if you buy. And you basically avoid the issue of the upfront option fee. It'll certain come up, but you want the focus to be on the lease and the ultimate purchase.

Once you have the basic numbers (lease amount, amount to be credited, purchase price, upfront option fee if any, length of option), these are reduced to writing. [Note: I'm not a lawyer, so this isn't legal advice.] From the buyer's perspective, you want one master document, incorporating both the lease and the option. The seller is better off with two entirely separate documents: a lease and an option to purchase. There are a number of technical reasons why. Either way will work, though.

Up to this point, no money has changed hands. There's no "earnest money."

When you and the owner sit down and sign the papers, remember that there are two related transactions. There's a lease. And, depending on the terms of the lease, you may pay a security deposit, first month's rent, last month's rent...that sort of thing. The security deposit gets refunded to you when the lease is up--just like a regular lease.

There's also an option to purchase. Typically, there's an upfront option fee. It doesn't have to be large. Forget any advice talking about 5% of the purchase price, or anything like that. Remember: This isn't a down payment on a purchase. This is an option, which you may or may not choose to exercise. In my first lease option, I didn't put a penny down. (A lawyer will tell you that for a contract to be valid there must be "consideration," which usually is money. But "consideration" is anything of value. I'd signed a 1-year lease-option, agreeing to pay $18,000 over the course of the year. Tell me: Do you think an $18,000 lease had some value? Of course it did.)

If you're using an agent, they'll want to use their approved forms. (Their brokers require it.) And that's OK. So, there may be offers and counter-offers. But again remember: You're not purchasing. You're optioning a property that you may or may not decide to purchase. And that's in your control.

There are also a variety of other documents that you should have to protect you. One is an "authorization to release information" signed by the seller. It allows you to contact the lender(s) to whom the owner owes money to verify that payments are up-to-date. Read some of the posts on Trulia about renters who are finding out that the property they're in is headed to foreclosure. There wouldn't be much you could do, but you'd know early on if the owner was running into financial problems.

You also want a "Memorandum of Agreement" to cloud the owner's title. Without it--without something on the public record indicating that you had an option on the property--the owner could simply sell the property to someone else...even though you had an option to purchase.

The downpayment is made at closing, if you elect to purchase the property. Depending on how the option is structured, you have been receiving some option credits that typically are applied either to the downpayment or to the purchase price. But, you're correct: That occurs at closing.

Sounds like you've done a lot of studying on the subject. Congratulations. And you've also spoken to a lender, one who understands your situation and apparently has provided good advice on what to do during the next year to improve your credit score. That's excellent. That's something that should be done for anyone going into a lease-option.

There's a lot of information out there on lease-options. Sounds as if you've also found some. Here are a few links that may help, if you haven't already discovered them:

Your present situation--and I'm not trying to disrupt the relationship you have with your agent--is that your agent, like most out there, is most familar with the traditional way of purchasing homes and is probably less comfortable with LOs.

Hope that helps.
4 votes Thank Flag Link Mon Jun 2, 2008
Don Tepper, Real Estate Pro in Burke, VA
Lease options may be handled differently in each market.

The seller usually controls the terms of the lease purchase.

If the home is listed as a lease purchase your agent should contact the listing agent and ask for the terms the seller is offering for the lease purchase option so you can determine if you and the seller can come to terms acceptable to you both.

The lease options I have seen over the past 20+ years require a substantial non refundable upfront deposit that is forfeited by the buyer if the buyer fails to close on the property within the specified term of the lease agreement. The deposit is usually at least $5000.00. The monthly rental amount can include an amount over the actual rental amount that is added to the $5000 and used towards the down payment and closing cost on your mortgage. Once again the additional amt over actual rent may be non refundable if you fail to close so many buyer's do not choose to contribute an amout above the monthly rental.

The percentage of Buyer's who actually close on the property they lease purcahse is very low in our area.

I have done 7 or 8 Lease purchases in my career only one made it to closing. It was a short term lease for 5 months. The original $5000 deposit was escrowed for the term of the lease and was applied to the Buyer's down payment and closing cost. The monthly rent was rent and no part of it was applied to the Buyer's down payment or closing cost.

Lease purchases may be done more frequetly in your area an be done differently. Not sure my information will help you.
Web Reference: http://www.cathysloan.com
2 votes Thank Flag Link Sun Jun 1, 2008

Let's try not to drag out questions from almost 2 years ago to make posts. It is a commonly accepted guideline to to keep the questions and answers recent to help people.

0 votes Thank Flag Link Thu Mar 18, 2010
There is a good book by Wendy Patton called Investing in Real Estate with Lease Options and "Subject To" Deals. It cost under $20. In it she explains how to work with Realtors and how they get paid. She purchases Lease Options through Realtors all the time and they get paid.
0 votes Thank Flag Link Thu Mar 18, 2010
The ethical answer to your questions is, if you are under a buyer's agent contract, a realtor can not comment about your situation specifically. The only thing we can recommend is talking to the broker of the real estate office your agent works at.
I did read your post that the agent has released you, so that is good. Just keep the above advice if this happens with your next agent. Makes sure to interview the agent before signing a contract to see their level of knowledge. You are correct that many agents don't have a clue about lease with option. That is sad, since that is the way many homes will have to be sold in this current market.
Don gave some good advice, but as you can see from the responses, lease with option is very flexible. You and your agent can make it fit your needs and your specific situation. It just has to be presented to the home owner correctly.
Best of luck with your new agent, you are now probably better prepared than most agents I have met!
Wendy Patton's site is great, so is she. She recently joined our company and has taught several classes on lease with option.
0 votes Thank Flag Link Sat Jun 28, 2008
Thanks for all the information, most I did know, but there's alot more detail in your answer, and THAT'S what I was looking for. :) I am familiar with the L2P site, go there alot also. Now why do you have to be in VA? laf Wish I could find someone in my area with YOUR knowledge and experience, and sounds to me, willingness to do a lease option. Sadly, I think alot of realtors don't want to bother, why would they, no commission for a year, if then. Actually, funny thing is, my buyers agent emailed me the other day and said she was releasing me from my contract, as she said:"she's not feeling well and isn't doing me justice". hmmm.... I think I knew too much...??? grins Anyway, couldn't have anything to do with her committment with the Parade of Homes out here, actually selling a house outright. Don't know, not sure. SO...if anyone's read this thread, AND Don's response and agrees with it, is familiar with it, and is willing to do some work (I'm picky and know what I want, won't "Settle" for less at this point-one shot at this, want to do it right). Please email me and let me know you'd be willing to be my new buyers agent. Thanks again DON! :) kim.patt @yahoo.com -Kim
Thanks to everyone for your answers also! :)
0 votes Thank Flag Link Sat Jun 7, 2008

I'm sorry. I did not want to discourage you. I know you can be successful in your endeavor to repair your credit and purchase a home. I should have elaborated more.

All but one of my Lease Purchase clients puchased homes , they just choose not to purchase the home they leased.

Between the time you choose your lease purchase home, and when you can purchase, your credit will be improved, interest rates and prices of homes may fluxuate. More possiblilities will be open to you.

When you are leasing a home you find out a lot of things you might not like about the home, floorplan, neighborhood, neighbors, neighbors kids, commute, whatever. ( one of my clients choose another home because of neighbors kids)

Once your credit is repaired, you are no longer limited to the selection of homes willing to do a lease purchase. You will find greener pastures elsewhere. Maybe a much nicer neighborhood, larger or nicer home, better area of town, better prices and value for your money elsewhere, etc.

What I am saying is don't put more upfront in escrow than you can afford to loose. Odds are you will not purchase the home you are willing to lease puchase today. Your options will be greater another day.
Web Reference: http://www.cathysloan.com
0 votes Thank Flag Link Mon Jun 2, 2008
I think you will see from our answers that there is no one way that these are done. I closed on a a lease option in April. I represented the buyer and the seller (and they knew each other) so the situation was a little bit different from most.

We wrote a lease application and the purchase agreement at the same time. It spelled out the future purchase price. The seller gave the buyer a series of bonuses for closing earlier. The buyer paid a security deposit prior to moving in.

The agreement BEFORE a lease-option is a lease application. With an application, you usually pay an application fee. Once the LEASE is agreed upon, you pay the security deposit. If you are negotiating the purchase/option at the same time, then you negotiate those fees and deadlines. The options I have seen done here do include the future purchase price.

You could ask to talk to the agent's supervising broker to see if they can answer more of your questions about the process in Lansing. From Michelle's answer, I gather they are doing things differently in GR. Really, I think that there are no hard fast rules on how lease options work, and it is just something that is negotiated. I do think you need at least a security deposit to move forward.

Good luck!
Web Reference: http://miOaklandCounty.com
0 votes Thank Flag Link Mon Jun 2, 2008
Maureen Fran…, Real Estate Pro in Birmingham, MI
I know here in Grand Rapids there are two ways to do this, lease with option and Land Contract. Lease with option - Just that.............you are a renter who has the option to buy at the end of your lease contract. Usually no purchase price is discussed till the end of the lease as both parties involved would want to check comparables at the time of purchase...........Deposit is usally equivalant to one months rent.
Land Contract - is a purchase.............The same as seller financing. 10 percent down on the agreed apon purchase price is usually required and interest is charged on monthly payment.
A land contract can help boost your credit as well, as the monthly payments can be used as credit history; also known as non-traditional credit.
Although you have a great positive aditude and it sounds like you are going to work really hard to get your credit fixed...............for the seller this is still a risk. They are taking the home off the market, for someone they do not know, hoping you are ready to buy in a year. Hoping you do not loose your job, hoping you do not get ill, hoping nothing happens that is out of your control, so you will buy the property.
In a lease option, OPTION is a key work here...........you have the option to buy the home in a year........ no guarentee for the seller that you will not find something better later on and not take the option. They are landlords that still have to repair anthing that is broke. So for some sellers lease option is not as desirable. That is why some will have a non-refundable deposit if not purchased...........
Lease with option usually does not require earnest money, as you are leasing the property.
Land contract does require earnest money.
I hope this helps...............and good luck to you.
0 votes Thank Flag Link Mon Jun 2, 2008
Thanks for the info. I know there's an upfront fee, the "option" and I know that it differs, however, my question is this: to make the original offer to the seller...BEFORE a lease option agreement is drawn up, you don't have to pay anything, correct? As in, usually if you're buying a home with conventional terms, when you submit a formal offer to the seller, you'd also include earnest money which would go towards your downpayment-in this case, there isn't a downpayment per-se, and the option money will be part of the "downpayment" WHEN I purchase, I shouldn't have to send anything along with my offer. I guess this was the first part of what I was asking. The second part was, do I make the offer just like I would if I were purchasing, or are there different procedures? OR is the whole offer process verbal? I thought it was more formal than that. Thanks for your help! :)
Cathy-I appreciate your input, but you know, after awhile being told a person can't do something, they start to believe it. I am in a great position to have my credit improve dramatically within the year, and know how to get it done-have already begun the long process. I've done my homework, and this is something I really want. Not to mention I'm a carrier mail carrier for the USPS and have been for over four years, so my income and job will count for alot. I've already spoken to a financer and he's assured me that taking the steps I need to take will get my credit where it needs to be within the year-and possibly sooner. I'm sorry you've had no luck with the people you've dealt with in lease options, but there are some people out there that truly can achieve what they set out to do, and I am one of them.
I know how a lease purchase option works, I've already done my homework, I just didn't know what type of paperwork was required for an offer, etc. But thanks again for your input and I really hope that the people in your area find someone to help motivate them into accomplishing their goals.
0 votes Thank Flag Link Sun Jun 1, 2008

Traditionally, the lease options I have seen in Michigan have had an up-front option fee associated with them, as your buyers agent is suggesting. This is a nonrefundable deposit that is applied if toward the purchase. We refer to it as an option fee.

You might find a motivated seller who would be willing to forgo the option fee. I would assume they will at least want you to give a security deposit.

There are no hard set rules about lease options. It is all negotiable. It would begin with a lease application and then a purchase agreement that specifies how everything will work.

I hope that helps just a bit.
Web Reference: http://miOaklandCounty.com
0 votes Thank Flag Link Sun Jun 1, 2008
Maureen Fran…, Real Estate Pro in Birmingham, MI
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