Need information on how to set up a lease-purchase!

Asked by Kelly Cooper, Memphis, TN Thu Apr 16, 2009

My husband and I just started renting a house that was also for sale when we began renting. The owner took it off the market when we moved in. We asked her if she is going to be putting it back on the market and if she might be willing to work out a lease purchase with us to get something moving now and she is on board. She said she isn't very familiar with how it works but that she's going to look into it. We also aren't very educated on how this works - are there any good resources for people who want to learn more about this option?

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Susan, , Massachusetts
Fri May 8, 2009
Earnest money deposit is not usually refundable. Make absolutely sure this is the home you want. The item that is negotiable is the monthly payments and what potion of them can be applied to the purchase price.

You can usually negotiate that 50% will. The more earnest money you can commit, the more you can negotiate this...anything over 5% of the agreed upon price.
1 vote
Dp2, , Virginia
Thu May 7, 2009
I agree with most of what Dana wrote, but I'd like to clarify a few points.

First, a lease-option (aka lease-purchase or "rent-to-own") transaction IS a form of seller financing, and it's NOT the same thing as a land contract (aka "contract for deed"--which is another form of seller financing).

Second, a lease-option is a compound transaction which consists of 3 parts: 1) an option to purchase a property by a future date at a specific price, 2) a lease, and 3) the purchase and sale agreement. The seller will collect an option fee that could be any agreed upon amount (and I'd probably not offer any more than 1% of the purchase price). One may negotiate whether the option fee is negotiable, and whether one may apply it to the purchase (as part of the down-payment). The buyer and seller will negotiate the amount of the down-payment (typically 10%). If a buyer can put 10% down already, then it would make more sense for the buyer to purchase the property using a wrap (aka "subject-to mortgage" or "all-inclusive trust deed"--which is yet another form of seller financing) instead of a lease-option. The seller handles the lease as a standard lease, and should make sure to include a provision in the agreement that the tenant/buyer has to be current on the rent in order to exercise the option. In addition to collecting market rent, the seller will collect an additional monthly fee (that's typically refundable--but can be negotiated to be otherwise) that will be escrowed for the down-payment. Upon the completion of the lease, the tenant/buyer may opt to exercise the option, renew the lease, or move out. If the tenant/buyer opts to exercise that option, then s/he usually will purchase the property using a wrap--unless s/he opts to obtain new, conventional financing instead.
1 vote
Dana Schuster, Agent, Slidell, LA
Thu Apr 16, 2009
Here are the basics;
1. you put down a non-refundable deposit(This is usually 10% of purchase price,but is negotiable of course)2, you sign a purchase agreement agreeing to purchase the home at a specific time(usually 1 yr. but again negotiable)
3.You pay a monthly rental that must be higher than going market rate.
4.The deposit & extra funds are put into an escrow fund which is used to build your down payment
5. At the end of the lease term,you will have your down payment which you will take to a lender to get a mortgage.
6. if you do not go through with the purchase you forfeit your escrow fund.
7. Whether the house appreciates or depreciates in value you are locked into the original purchase price.

I suggest getting either an attorney or an agent who will draw up the contract for a flat fee.
1 vote
Dp2, , Virginia
Fri May 8, 2009
Oops . . . I noticed upon a re-read that I needed make one slight correction. The statement, "One may negotiate whether the option fee is negotiable," should have been: "One may negotiate whether the option fee is refundable. . . ."
0 votes
Jackie Stanl…, , Burnsville, MN
Thu May 7, 2009
If you could qualify as first time home buyers you might ask instead for seller financing. In Minnesota it's called contract for deed. Then you would qualify for the $8000 Federal tax credit which you could get this year yet by amending your tax return and that could be used as a down payment.
0 votes
Gerald Willi…, Agent, Germantown, TN
Thu Apr 16, 2009

The best answer is to have a Realtor set this up for you. The Realtor can act as a transaction broker making sure everything is done as it should be and making sure everyone involved is aprised of their obligations and exposures. In my opinion this is the best way.

Gerald Williams
Affiliate Broker
Mortgage Loan Officer
BenchMark Realtors, LLC
BenchMark Mortgage, LLC
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