how does a lease-purchase work? what kind of deposit must I give the seller? is it harder to get financing?

Asked by Rob, Seattle, WA Wed Feb 18, 2009

do i take care of the inspection and financing before signing the contract? definitely would appreciate a step-by-step outline. thanks!

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Don Dutton, Agent, Puyallup, WA
Thu Feb 19, 2009
Many good answers to your question here Rob, but you can forget them all. Lease-purchases are no good, not ever, never, period. When you have to purchase you'll wish you had never gotten involved in one and I'll tell you why. When you negotiate a lease purchase you'll be paying top dollar for the home. The only homes which are available under these terms are the ones that can't sell on a normal deal because they are overpriced or have some other problem that has scared every other financeable buyer off. Furthermore, you'll be paying rent above market during the lease term. This is necessary so the seller isn't upside down on their mortgage and looses the home to the bank while your renting it. When you square away your finances and get approved for your loan to accomplish the purchase you'll suddenly realize "I could go out and buy any home for this price right now" and I guarantee you'll be able to find a better one than you picked before. Now is when you'll be going to an attorney to try to get out of your deal. You probably will but it will waste your money. I've seen it dozens of times over 30 years of the business. So, what should you do???

Negotiate a lease-option instead. At least you won't be obligated to buy in the future. Don't pay a penny more than market rent because you'll never be buying that home anyway. Any rental credit is a waste of your money. And don't get involved in any property where the seller doesn't have at least 20% equity. There's lots of tenants out there right now moving because the house they're renting is in foreclosure.

jSorry if that sound harsh but it's reality. Good luck!
2 votes
Thank you sooo much Mr. Dutton for being honest about this. I totally appreciate honesty. It doesn't matter if it sounds harsh or not the truth is the truth. I was just about to make the mistake of a lease purchase. Your response here just saved me a bunch of future grief I'm sure. Once again thank you very much.
Flag Thu May 29, 2014
Mary Sunde, Agent, Bellevue, WA
Thu Feb 19, 2009
With a lease purchase you most definitely want to do your inspection first and make sure that you do or
will qualify to close the purchase. (Kevin Smith from wells fargo,, 206-389-
1100). A lease purchase is just like a regular sale but the closing date is lengthened and the buyer
is allowed to occupy (rent) the property prior to closing. Just as in a standard purchase you want to make
sure that your purchase and sale agreement allows you (before moving in) to do:
perform and if necessary negotiate a building inspection
use title contingency addendum to assure seller has clear title and there is nothing objectionable to you
make sure you will qualify to purchase the home (contact lender now)
draw purchase and sale agreement with lease/purchase addendum
state terms of lease (how much will you pay, what utilities are you responsible for etc)
you can use standard lease agreement
state if your earnest money is refundable to you and if so why or if it is non-refundable deposit
I assume that seller will do any repairs required such as furnance and you will be responsible to return the home in the same condition as when you begin occupancy
Will any of the rents apply toward your down payment?
Since this is a bit out of normal I would suggest you have your papers reviewed by a real estate attorney
this will cost you anywhere from a few hundred (without changes or with few changes) upwards

What is the reason you are doing a lease purchase instead of standard purchase? Are your funds to purchase coming at a later date? If so, make sure you are definite that you will receive them or you might risk your deposit. The danger in this market is that there is a chance that the home might not appraise when closing the sale or your qualification may change and you will have lost your deposit. If there is any question of home value I would have an appraisal done now even if you pay for it (usually around $450 for a value under $500K).

Mary 206-227-1915
2 votes
Dana Schuster, Agent, Slidell, LA
Wed Feb 18, 2009
Basically it works like this: you put down a(non-refundable) deposti which is usually 10% of purchase price. you pay a monthly fee which includes a certain amount on top of the regular lease payment which is deposited in an escrow account to build up your down payment(also non-refundable) At th end of the agreed upon term(usually 12 mos.) you will have a down payment built up which you will take to a lending institution to get financing. You will have agreed to purchase the house at a specified price. if the value of the house goes down(or possibly up) you are locked in at that price. When you get your financing,you will have the opportunity to perform inspection,will have to purchase insurance and comply with any other requirements of your lender.if you do not go through with the purchase,you lose your deposit and escrow.
2 votes
Dana Schuster, Agent, Slidell, LA
Thu Feb 19, 2009
Thumbs up,Don for a great answer. So few people really understand this concept. it's not like buying clothes on layaway(Do they still have that?)
1 vote
Rob Graham, Agent, Seattle, WA
Thu Feb 19, 2009

I have to say I agree with Steve on this one. A lease to own can be a very messy transaction. If you already have a home in mind, talk to the owner. See if they would consider financing the home for you. Mary is also correct in that you should have an attorney look over the agreement before you sign it.
I respect that people are trying to be creative in how they take posession of a home, but lets keep in mind that creativity got us into this mess in the first place. You may want to consider waiting a while, set aside additional funds each month. Put it in a savings account and when you have 3.5% of the range you are looking for, get an FHA loan from the bank and go the traditional rout.

Just my thoughts.
1 vote
lets keep in mind that the creativity you are refferrig to was born out of the ideas of you ( so called ) proffessionals who took advantage of us laymen who just wanted to but a home for our families . . . who knows more about what person can afford what home ? the layperson , or you " proffessionals" ? it was YOUR underhanded dealings that inflated , then burst the bubble . and it was the layperson that had to bale you out of the mess you created for us . and what was te penalty for you proffessionals ? tougher restrictions on US , the BUYER . not you proffessionals who deserved the punishment . . . creativity is great when you can make a buck off putting people in situations you know are bad for them , but it works against you when buyers find a way to leave you out of the loop - lease to own - . i think its halarious .
Flag Tue Feb 5, 2013
Just wondering, as someone who knows nothing about home buying, why do you say 3.5%? Don't most loans require a 20% down payment? Or were you talking about something completely different?
Flag Mon Apr 23, 2012
default defa…, Agent, Renton, WA
Mon Feb 10, 2014
Lease with an option to purchase is in essence a contract to make a contract, you lease the property and under the agreement you have the option to buy the property within the specified timeframe in your agreement. It is not an agreement to purchase, it is only an agreement to be able to purchase within the timeframe. What you are referring to is just owner financing. The parties would need to have a purchase and sale agreement and a financing agreement. There are no requirements for down payment or deposit beyond what is agreed between you and the seller. You can seek "typical" lender financing once you believe you can qualify, somewhat similar to refinancing. If the financing agreement with the seller mentions a prepayment penalty you will have fees involved with the payoff, another thing to consider is when seeking financing the property will need to appraise close enough for you to cover any deficit in what you owe. A bank will not lend on property beyond the appraisal amount. Owner financing is normally done with substantial risk to the seller, which would make me more inclined to scrutinize the motives of a seller willing to finance a buyer. It is a less common practice, but it can be done with success. Good Luck -Kjell
0 votes
Bill Dunger, , Tacoma, WA
Mon Feb 10, 2014
There are options out there for you. Contact me and I can share a program that has worked for many of my clients. There are only a few main requirements which I can go over with you.

1. Must want to own a home
2. can demonstrate the ability to make monthly payments
3. Ability to have 8-13% deposit in escrow

Are self-employed and need to use bank statements to verify income
Have had a recent foreclosure, short sale, bankruptcy or credit problem
Are tired of renting and ready to lock-in home prices before they rise
Are eager for more stability in their living situation
Are likely to cure credit issues and obtain mortgage within 6 years

Single family homes (no condos/units)
owner occupied only
Previous bankruptcies, foreclosures and short sales are OK! (1 day out, no seasoning!)
Bank statements OK! (income sources/cash flow verified)

When qualified....Pick out a home with your agent, move in....then you will have up to 6 years to close escrow at guaranteed, pre-determined price.

there is NO credit score requirement per say.

Email or call me for more info. 253-232-5843
0 votes
Victor Kamin…, Agent, Edison, NJ
Sun Oct 25, 2009
I like HHI Investing, LLC answer because it's funny how he tries to defend the Rent-to-own model and trash or undermine Realtor views for opposing it all in one breath but I understand why. This type of purchase scenario only goes to benefit the owner or "investor", isn't that right HHI "Investing", LLC (See my point people)

So all the smoke screen comparisons to driving a car for fear of other driver not using their blinkers and other ridiculous comparisons are just slick sales talk not intended to benefit you as a buyer.

You're better off with a lease purchase "option" over Rent-to-own unless the seller is the one that will finance your purchase loan for that house and apply your entire rent toward your purchase of their home.

First take a look at WHY someone would want to Rent-to-own and how it would benefit you as a BUYER?

- You have bad credit now (so start working on fixing it and make an offer to purchase later, it's much safer)

- You don't have money for the down payment now (Well that's fine and all but what about closing costs, there is another trick of this, if you pay and pay to gather enough for the down payment, by the time you can purchase you'll be saying uh oh..... when you find that you'll also need to pay closing costs and don't have it just to lose all that money you saved for down payment)

That comparison of leasing a car to buying a home gave me chuckle to, funny stuff...

You're dealing with a lot of money and just as leasing a car is a waste of money for most people unless your a saleperson that uses the car for business use only and can deduct the lease cost 100% from your taxes or just want to trade it in for a new one every 3 years, it just don't make sense to do so and neither option would apply to the purchase of a house. Another thing left out is that when you lease a car your payments aren't higher than what the monthly purchase payments would be unlike with Rent-to-own.

I'm just saying, by the time that lease is up and your presented with the option to buy the car, it's usually no longer worth it but by then you have an emotional or financial attachment to it that leads to "pressure" or a mis-guided thought of loss if you don't follow thru with that purchase.

Maybe if that car or home "gains" in value and you preset the amount you are willing to purchase that home for in the rent to own scenario does it really make sense to follow thru with buying it.

- Remember you'll still need to qualify for a loan from a bank or 3rd party lender

- The home needs to appraise for the purchase price at time of purchase regardless of what it was worth when you made the offer or began renting. (This is why in a declining market this is a very bad option)

- Will your down payment or additional rent be refundable if you still can't get a loan later? (NO!!!!)

- Home inspections should be done BEFORE leasing at an inflated rate because if you later find issues with the house your stuck, especially if they apply the amount of rent over market norms intended for the down payment are not refundable and just applied "as rent" if you don't continue with the purchase.

I see many negatives to this type of purchase approach for a buyer, this is more of an "investor" or owner tool to get the upper hand and control in the purchase.
0 votes
Leasing To O…, , Dallas, TX
Fri Feb 20, 2009
It's amazing how many Real Estate Agents TRASH Lease-to-Own possibilites. (ie...Don Dutton)

Lease Options can be great for buyers who need some time to get their credit together or to save up for a downpayment. Yes....if it's not structured correctly, it can be a nightmare, but so can a normal real estate transaction.

Our company specializes on Lease-to-Own strategies. I personally love them as an Investor! We can help people out of a situation where they HAVE to sell their house or tenant/buyers who have a stable job but need some time to get their finances in order.

In response to Don Dutton's statement on Lease Options..."Don't pay a penny more than market rent because you'll never be buying that home anyway. Any rental credit is a waste of your money. And don't get involved in any property where the seller doesn't have at least 20% equity. There's lots of tenants out there right now moving because the house they're renting is in foreclosure.".........That is a very narrow point of view.

Just because someone got into a car accident because the other driver didn't use their turn signal doesn't mean that NONE of us should EVER drive again for fear someone else might not use their turn signal.

Structured correctly by a PROFESSIONAL who understands the in's and out's of Lease Options IS the most important part of a deal. That's why many Real Estate Agents don't do them. It's outside their scope of knowledge. If you do your homework and learn the correct way to do something it becomes easier to do...........Would you stick a person in a car who had never seen one before or had never learned how to drive.......No.

The Investors we work with DO charge the appropriate amount for the monthly lease..........
We DO offer rent credits to our tenant buyer so that when they make their payments ON TIME, they have some equity in the deal at the time of closing (it can be looked at as forced savings).......
We DO offer to credit the tenant/buyer's upfront non-refundable option consideration when they decide to exercise their option at closing......
We DO work WITH our tenant/buyers to assist them to rebuild their credit......
We DO realize that some tenant/buyers do not exercise their option to buy. That's why we screen them prior to them moving in to make sure they have a good chance at buying in the future. Otherwise we generally refer to them as "Renters".......
We DO set the purchase price for them in the beginning and let them know that if, at the end of their lease, they don't want to buy the house because it's valued less than the price we had agreed to, then they don't have to buy. BUT, if the house is valued at more than the price we agreed to, then they buy the house with extra and instant equity.......
We DO also suggest setting up the deal where all monthly payments from the tenant/buyers go into an escrow account set up by an KNOWLEDGABLE attorney so that they and the sellers know the payments are being made directly to the bank/mortgage lender and the house won't fall into foreclosure. They should also have their Option on the house recorded so that the seller doen't try to sell it out from under them.

It's virtually the same as Leasing a CAR! You can BUY it for $300 per month for X years which it will then be yours....OR you can LEASE with the OPTION to buy for $400 per month and at the end of 3 years, give it back to them or BUY IT! I wonder how many of the people that SLAM Real Estate Lease Options actually Lease their cars from the dealer?

And to respond to Rob Grahams statement...."I respect that people are trying to be creative in how they take posession of a home, but lets keep in mind that creativity got us into this mess in the first place.".........Is he aware that WAYYYYYYYY back in the 70's, people were doing Lease Options and Contracts for Deed when they had difficulties obtaining mortgages?

“A pessimist is one who makes difficulties of his opportunities and an optimist is one who makes opportunities of his difficulties” ~ Harry S. Truman
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0 votes
Kassandra Ro…, , King County, WA
Thu Feb 19, 2009

Lease Options are a great solution depending on the individual's needs. I own a Real Estate company that specializes in lease options. We have hundreds of investors looking for an exit strategy other than selling today. Don't get me wrong, selling today would be nice, but these days investors are tired of making multiple mortgage payments. Yes, you should enter into a contract that is mutually beneficial and reviewed by an attorney. But, what makes this program work, is YOU. Your desire to stop renting. Using resources such as loan officers and credit repair from day one. I actually lease optioned the home I own. I found the perfect place and had enough to remodel or purchase as is, but not both. I had an investor buy me the home, used my money to remodel the property and then turned it into a conventional loan 10 months later. Now, this was risky on my part, because I had a lot to lose if I didn't exercise my option! I was determined to make it work and I was successful with the transaction. Most of the homes we offer have already been remodeled and are move in ready. How soon do you want to move? Check out our inventory at - call, email and start asking questions. We are here to help. Less than perfect credit is ok. If you don't see a property that will work on our site. Let us know what you are looking for. I have no doubt, we can find you a home!
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funny how this "company" no longer has a website...
Flag Tue Jun 19, 2012
Mark Despain, Agent, Seattle, WA
Thu Feb 19, 2009
I am in agreement with Rob and Steve in that lease-purchase contracts can be tricky. Do not consider anything without having an attorney review to clearly explain all of the terms of the contract. The contracts also do vary widely. Unless you have a good relationship with the seller and they really want to "help" you get into a home, it would be better to save money towards a down payment as Rob said.
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Steve McDona…, Agent, Seattle, WA
Wed Feb 18, 2009
I['m certain I've answered this question along with others and you may be able to find those responses in Trulia's archives. Even so, a lease with option to buy is tricky. The key is the valuation of the home and how it fares over the time of the lease period. It's unlikely in a declining market that the value assigned today will hold up for a bank appraisal in a year or two. Of course an appreciating market will serve you well. Knowing where the market will head is really anyone's guess. One option might be to discuss having the owner finance your purchase for a limited time period (i.e., 5 years). By the end of the term you must make a balloon payment for the remained for the loan balance. That's a fancy way of saying you'll need to refinance with an institutional lender or sell the property to payoff the (current) owner. There certainly is a better chance that a longer term scenario will provide you an opportunity to buy now and successfully pay later. That new $8,000 homebuyer credit might be a good start to begin paying down your principle. Now all you have to do is sell it to the owner. Good luck.
0 votes
SeattleHome.…, Agent, Seattle, WA
Wed Feb 18, 2009
In some cases, Rob, you may be able to get a more standard lease with an option to buy. In this case, you wouldn't need to put up an initial downpayment, but you would pay a monthly rent plus an additional non-refundable amount every month that would count toward the purchase. At the end of your lease's term, you'd have the option to enter a purchase contract for the home (at your previously locked-in price) or just walk away.

Lease-purchase-options etc. vary widely, so you need to examine the particulars of the contract that each individual seller is offering.
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0 votes
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