Expert: liznarr - 12/11/2011

Question
My parents were offered a Lease Purchase deal. The buyer will pay my parents $400.00 a month for 2 years and at the end of the 2 years will do a pay out of $35,000.00.  The Buyer will be responsible for the HOA, all utilities and any repairs that need to be done to the home while he is there.  My parents will have no out of pocket expenses as their home is paid off.
Does this sound like a good deal?

Answer
Hi Ralph,

I would need much more information to determine whether or not this might be a good deal.

I am not a big fan of long-term lease-purchase agreements, and I personally would classify a long-term lease-purchase agreement as anything more than 3 months for purposes of this discussion.  

The reason most people usually need a long-term lease-purchase agreement is bad credit…and bad credit usually reflects on character.  The exceptions to this are job loss (especially in this horrible economy) and medical bills.

So, for starters, your parents need to check credit on the potential buyers.  I would require the buyers to get a pre-approval letter from a lender (not a pre-qualification letter, BIG difference).  You want the lender to actually run their credit and perform a MORTGAGE credit report as if they were purchasing NOW.  For any adverse items that show up, a good qualified lender can assess whether or not in two years these buyers may or may not qualify for a loan at that time.   If the buyers have bad credit now, unless they are diligently working to pay off debt and repair their credit, they may not be able to get a loan in two years.  Then what?  

Next, your parents will be turning their property over to people who may or may not take proper care of their property.  I have seen tenants do more damage in just a few months than I care to remember.

Your parents will be effectively taking their property off the market and preventing any other buyers from purchasing for the next two years.  In order to help protect your parents against tenant-damages to the property they could ultimately be liable for if these buyers cannot pay out in two years (and to also compensate them in the event of a non-closing on the part of the purchasers), I would strongly recommend that they require an amount of upfront money to cover damages.  Your parents should require whatever amount they feel comfortable with.  That amount could be $5,000 or more, depending on the value of the property.  Whatever amount is decided upon should be NON-REFUNDABLE in the event of a non-closing for ANY reason on the part of the buyers.  This money paid upfront will be an incentive for the buyers to take care of the property, keep their credit in order, and ultimately---CLOSE and cash-out with your parents.  

Your parents will need two documents for this transaction:  A Contract of Sale spelling out the terms of the purchase, and a separate lease agreement which should be incorporated into the Contract of Sale.  The lease, especially, should spell out numerous protections for your parents.  

A couple items that come to mind are who pays for property insurance and also the buyers need to insure their contents and not hold your parents responsible in the event of any loss to the buyers’ personal contents in the house.

The list of protections for your parents could go on and on, but a good attorney should be able to draw up this document for you.

I hope the above is helpful.  If not, or if you have additional questions, please feel free to write again.

Regards,
Elizabeth