Home Selling in Berks County>Question Details

Rich, Home Buyer in 19506

What are the pro's and con's of a lease purchase?

Asked by Rich, 19506 Mon Sep 22, 2008

I need to relocate and most likely will have a difficult time selling my current home right now. Would a lease purchase be a good option to go with? I am sure I can get enough to pay the 1st mortgage with rent and I can handle paying the second mortgage and will most likely pay it off with in a year any way. With the lenders tightening their criteria I am thinking there maybe people looking for this kind of opportunity rather than rent.

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The person that agrees to a lease option is trying to forecast future property values. If the buyer agrees to buy your property for $100,000 in two years, and it becomes worth $110,000, and you and he agreed that the option payment is going to be an extra $200 per month (24 x $200 - $4,800) then it would be smart for him to buy it at $110K because he would be buying for under market value.

If the value decline to $90,000, it would be cheaper for him to walk away (or keep renting) than to exercise the option.

You need to make a call. Obviously of the ONLY way they can afford to buy is lease option (due to perhaps credit issues), and perhaps you carry back part of the note for the downpayment, then it may make sense. But for buyers you'd have to put together the contract so it is win-win.

I agree with your perception of lenders tightening underwriting requirements. You might look into owner financing, that might be more direct and avoid the change in value problem.
0 votes Thank Flag Link Mon Sep 22, 2008
Keith Sorem, Real Estate Pro in Glendale, CA
There seems to be a little misunderstanding, I am the seller. I already have a few rental properties so I am not green to being a landlord. I just never did a lease option before and figured I would be able to get it occupied fast this way than a conventional sale with the current credit crunch.
0 votes Thank Flag Link Mon Sep 22, 2008
One other HUGE con that I neglected to answer; you pout a downpayment on a proeprty and make payments, including additional dollars to principal and the Seller stops paying his mortgage. He gets foreclosed on, you have no idea and he's got your money.

Lease purchases can work, I've done tons of them (more in the past as "installment sales" but, you need to know the risks.
0 votes Thank Flag Link Mon Sep 22, 2008

A lease purchase is a fantastic option. In Philadelphia, we have become the lease-purchase experts per se as we marketed a whole building as lease purchase and have it at 90 percent occupancy now. The benefit to our client is that without the lease purchase option, he would have a much greater percentage of vacancies and be under water on his debt service. Thus, you will be able to get your property occupied quickly, you will be able to charge a higher rent and position yourself that it will be sold within the lease purchase timeframe. The benefit to the buyer is that it gives them time to get their credit tight, it provides an automatic savings account that can go towards the purchase and some latitude if they like the area. It really can be a "win-win" depending on your goals.

Good luck ! If you have any specific questions, feel free to contact us through our site below.
0 votes Thank Flag Link Mon Sep 22, 2008
Pros are the ability to find your home now and work toward putting yourself in a situation to finance it at a later date. Also a pro, as you must compare Lease/Purchase to renting is that you apply a part of your payment ot your downpayment.

Cons include the fact that if you cannot obtain finanicing in the proscribed period of time, you will lose your downpayment and any money you put into the transaction. If the market declines, you're still on the hoolk to either make the purchase or walk away from your downpayment.
0 votes Thank Flag Link Mon Sep 22, 2008
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