HOW DOES A LEASE TO PURCHASE AGREEMENT GENERALLY WORK?

Asked by Basco, Natchitoches, LA Tue Nov 29, 2011

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5
Mike Sullivan, Agent, Gainesville, FL
Tue Nov 29, 2011
Generally the lease purchase is an agreement whereby you 'lease' the property for a specified period of time, with the option to purchase the property at a specified price during the lease....a portion of the monthly lease amount may be set aside as a portion of the purchase price..i.e. $100 each month will go to the purchase price. A deposit amount is also set aside as a 'down payment', which is generally non refundable...it in essence is a contribution toward the purchase price, and a 'fee' for the lease purchase agreement. Maintenance during the lease period is generally the responsibility of the tenant, up to a specified amount. The specifics of any lease agreement will be specified in the contractual agreement, and is negotiated between the two parties. There are typically two agreements...one for the lease, the other for the purchase option....only the buyer has to execute the option. If they decide not to purchase, there is no deal.

Hope this helps!
1 vote
Anna M Brocco, Agent, Williston Park, NY
Tue Nov 29, 2011
A lease with the option to purchase is similar to a car lease; inform yourself well before entering into such an agreement, and do consult with an attorney who specializes in real estate; this scenario can be risky and one could stand to lose a bit of money.
0 votes
Jim Simms, Mortgage Broker Or Lender, Louisville, KY
Tue Nov 29, 2011
They are not as simple as the previous answers imply, they are very complicated when it comes time to exercise the purchase option so research the subject in depth before jumping in. They are probably not what you expect. Be careful putting up any large sum on a rent-to-own, most buyers and sellers are under the impression whatever deal they put together will be accepted by any lender when it comes time to actually purchase a home, not true. The mortgage underwriting guidelines are very specific and an underwriter may not agree with the terms on your original lease option. You may think all or part of the rent paid goes to down payment, not necessarily how it works when it comes time to close the deal.
As for rent to own, research the subject in depth before jumping in. It is probably not what you expect. In this type of transaction the underlying assumption is the seller will be able to perform in addition to the tenant/buyer. That is a very big what if, sellers are not subject to the same federal regulation as banks, do you really know the seller well enough to give them your hard earned money? I have discussed this in the blog entry linked below. Other entries in my blog will also shed some light on the subject. Most of the sellers interested in entertaining one of these transactions will already owe money against the property so they will not (should not) want to record any contact that might trigger the due-on-sale clause in their mortgage. Unrecorded contracts are difficult to protect should something happen to the seller, divorce, illness, death just to mention a few.

Finally, the reason most people seek this type of transaction is because they are not eligible from a mortgage from a traditional lender. Any work around to side step the mortgage underwriting guidelines shifts the risk from the lender to your side of the ledger, greatly increasing the odds of disaster. The guidelines are actually fairly liberal despite what most people believe. I have linked below some info on rent to own, but there are several other topics on my blog that may protect you. I hope my observations keep you away from harm, good luck.
0 votes
Tim Moore, Agent, Kitty Hawk, NC
Tue Nov 29, 2011
I liked Mike's answer, it was spot-on. The only part he did not say much about is that if the house does not sell, by the agreed time (1 or 2 years), the deposit and the extra $100 each month is lost to the landlord. You, as the future buyer and current renter, has to be able to get a loan and buy the house. If the house value drops below the agreed price the bank is not going to loan you the money or if your credit suxs now and if it still does then you can't buy and you will lose the money set aside. There are many pitfalls and it is always in the landlords favor.
0 votes
Katherine Ra…, Agent, Mandeville, LA
Tue Nov 29, 2011
In Louisiana you have the choice of a lease purchase or a bond for deed. In both situations the transfer of title does not occur until the final closing takes place at the end of the agreed upon term. In a lease purchase, the seller/lessor remains responsible for taxes and insurance (usually built into the monthly rent) while in a bond for deed the lessee pays those expenses as if he owned the property already.

You can also structure a lease with OPTION to purchase whereby if the buyer chooses to purchase he can apply the security deposit towards the price but he is not REQUIRED to purchase.

In essence, lease purchases and bond for deed are the equivalent of owner financing until the buyer can get permanent mortgage financing. They are usually used to build a credit history or to bide time after a short sale, foreclosure, or bankruptcy. Plus when the lessee/buyer applies for a mortgage it can be treated as a refinance rather than a purchase so the qualification requirements are different.
0 votes
Do you have a lease purchase form or an owner financing form that you use?
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