In this economy, how does the "lease to own" option look to the sellers (private, bank, etc) ?

Asked by Rw, Seattle, WA Tue Feb 3, 2009

This is what I would like to do.

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Kassandra Ro…, , King County, WA
Thu Feb 19, 2009
The sellers favor this very much, when their listings are not getting any offers. There comes a point when an investor needs to stop the bleeding if you will. A lease option allows a tenant to take mental ownership of their home. Prepare for the downpayment and work on credit issues. Certain lenders know how to process these transactions and use your lease as evidence of your ability to pay in the future. Be careful of over inflated, too good to be true Rent Credits. Lenders will do a rental evaluation of your home and determine a True Rent Rate. Your credits can only be a few hundred more than the True Rent Rate, if it is overly inflated you cannot use the additional money as a down. Ultimately it will be up to YOU, to prepare yourself to get approved. It's a great way to stop renting and get on track for homeownership. We work with hundreds of investors that will help you lease option a home.
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Steve McDona…, Agent, Seattle, WA
Tue Feb 3, 2009
It really depends on a couple of variables the primary ones being the agreed selling price and the length of the lease. Assuming you have a credit worthy buyer, your next step is to assign a price to the property. Of course that will be highly dependent on a current market analysis. Let's say the market starts heading upward while the lease period is underway. It's likely you'll have a successful sale when the time comes as long as your buyer remains in good standing with credit bureaus and has sufficient funds for the necessary down to obtain a loan. If not, you get to sell the property at a higher price. On the other hand, if the market moves downward it's likely your buyer will be able to find a lender for the agreed price unless the buyer comes up with the extra money to cover the gap. That means you'll be placing your property on the market when you're likely to get a lower price. Either way it's hard to predict the future.

Alternatively, if you own the house 'free and clear' you may want to consider owner financing where you become the lender. This way you get to sell the house at current value and collect mortgage payments (likely higher than a rental payment) . You can make the arrangement so there is a 'balloon payment' at the end of an agreed period (i.e., 5 or 10 years) when the buyer must refinance or pay off the balance. So your risk is for a limited time. Of course, there is the possibility the buyer defaults on the loan and you'll be looking at foreclosure proceedings. You also need to consider tax implications if the property is a rental. Owner financing may invalidate a 1031 Exchange option and more.

I guess there's no simple answer to your question. Depending on your goals and risk tolerance one direction or the other will require more research than can be covered here. Your CPA might be able to provide some insights for your personal circumstances.

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Rob Graham, Agent, Seattle, WA
Tue Feb 3, 2009

The lease to own option heavily favors the buyer. I have not found many sellers who know what they are never mind that are willing to entertain the idea. It's true that in this buyer's market they are more willing to be creative, but the risk that the seller takes often makes them unwilling to pull the trigger.

As an alternative, I would suggest finding a home you are comfortable with and asking the seller to consder financing it for you. Seller's are somewhat more willing to do this, although to be honest they are also not too keen on the idea.

Just a thought.
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Kary Krismer, Agent, Renton, WA
Tue Feb 3, 2009
Lease to own, as opposed to lease/option, is extremely risky, and a seller should consult a real estate attorney prior to even considering it. The concern is having your property tied up in litigation for years if the deal falls apart and the buyer doesn't want to walk. With lease to own you've basically let someone come into possession under a contract, and unwinding that can be difficult with the "wrong" fact pattern.
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Kenzie Kipper, Agent, Seattle, WA
Tue Feb 3, 2009
The lease to own is now more widely accepted. Sellers who are more motivated or have a large amount of equity in their home may consider this option. Most will require a large amount of earnest money which can be negotiated into the purchase.
Kenzie Kipper
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