Lease to Own

Lease to own agreements are becoming more popular as the real estate market is seeing a flood of sellers who cannot sell their homes.  Some people call "lease to own" bets for suckers, because the benefits are loaded up in the  sellers court. We have a situation where the recession/depression is leaving sellers in a difficult situation of needing to move but unable to sell their home.  In addition, we have quite a bit of real estate investors wanting to flip homes, but the market is not allowing them quick sales, so they risk foreclosure as a result of  juggling a couple mortgage payments.  On the flip side, the millions of people who have lost their homes through foreclosure have limited options because their credit is messed up, and they have no money.  Buyers are eager to find new homes but need time to fix their credit, finalize their divorce, and gather a down payment together, so" lease to owns" seem attractable to most people.

Virtually all the information advertised from realtors and investors are positive, because they have so much to gain.   The seller makes out extremely well on the deal, because they have potential buyers willing to pay them rent first , but also an additional fee each month above the rental price that goes toward the down payment on the house.  So,.... the seller is getting double payments during the time they are leasing the property.  In addition to the income stream, they also get a signed contract which states the seller is obligated to purchase the home at the end of the term.

How does it work?

There are two contracts in "lease to own" agreements. The first contract is a "purchase option".   The "purchase to own" contract is very similar to a "purchase to own" contract in a general house sale.  The length of the term of the agreement is negotiable, but the common length is generally from one year to three years, instead of the typical 30 days on a house sale.   The second contract is a rental contract which you typically would see if you were renting an apartment.

What are the pros for seller?

1. No risk of foreclosure- The biggest positive to the seller is not having that risk losing the property to foreclosure if they are not able to sell it on market.   It gives them a way out of getting the full asking price of their property marketing it to a larger group of people who cannot buy, or qualify for a loan.

2.Huge Payday- The seller receives an above market price for their property in rent.  In addition, many investors know that there is a greater chance that the buyers will not qualify after the agreement expires, so they make a substantial amount of cash, as the option money is rarely refundable.
3. Excellent Tenants- The seller/landlord will get the best tenants, because they are tenants who intend to buy and who have put down cash to guarantee their intentions.  A tenant interested in a lease purchase option is usually a quality tenant who will treat the home like it belongs to them.

2. Win/win Situation- Since rent lease options are in high demand, the owner does not have to discount the sales price on the property.  They either win by selling their property in the end, or they win because they keep the down payment.  It is the perfect opportunity for todays flipper.

What are the cons for seller?

1. Sales Fall Through- The sale on lease purchase properties often fall through. So, they might lose out on the sale, but on the other hand they keepthe substantial deposit, and worst case scenario, they start all over again.   Tenants often decide to purchase a different property, or wind up not being able to purchase at all because they don't qualify.

2. House Values Appreciating, or Depreciating- If the seller decided to lock in the sale price of the home at the beginning, the seller may miss house appreciation.  When doing this they take the chance that they may miss extra income if the value of the home, but in today's market and through the future, the homes are not  appreciating, but are falling in value.  It may be their only chance getting out on top of the current market conditions.

What are the pros for buyer?

1.A Chance of Purchasing A Home.  The buyer gets an option to purchase a home where they may not have many other options.  Their credit may be ruined from a foreclosure or bankruptcy giving them no options to buy.  This gives them an opportunity of saving their down payment over the year, and fix up their credit and qualify for a better loan, while having their dream home.  If the buyers are very serious about the home, it allows them a second opportunity to own a home.
What are the cons for seller?

1. Loop Holes For the Seller- Dishonest property owners can cancel the agreement  because of one late payment and keep the downpayment.  They count on the tenant not being able to qualify for the home at the end of the term.  A buyer can avoid this by writing into the contract an allowance for three late payments before forfeiting the rent lease option. Remember, there isn't a guarantee that the buyer will qualify for a loan at the end of the term, consequently, they would forfeit the additional down payments.   Unless a buyer is very serious about the particular property it would only make sense to suggest a safer approach such as renting before they are able to qualify for a home.

2. Losing The Down Payment-If the buyer decides to not to go along with the purchase, they lose their down payment, which could be one-month rent to several months rent, plus the lease option amount being paid monthly.  In addition, buyers are often responsible for maintaining the property and paying all expenses associated with its upkeep, including taxes and insurance.

3. Commitment Issues- The buyer has loopholes in the commitment, making it a greater chance they will walk away. Statistics show that most couples that live together before they get married often result in brake up.  Both people know that they can walk away or give up at any time because the commitment is not officially finalized, so one disagreement is cause for the justification of walking away.  The same goes for a pair of shoes.  Once you have them, and wear them, they loose their "specialness" and the excitement is lost, it is easier to toss them aside.  If a buyer lives in a home for a year, and has the inticement of something better comes along,  chances are they are more willing to toss their deposit aside and go after the better home than sacrifice.  As a buyer, you can find most defects through an inspector within a month, than trying out a property for a year in hopes to find any additional defects.  Walking away is a hefty price for just "making up your mind", and biding your time until your able to qualify for a home.