Expert: liznarr - 5/31/2004

Question
Hi Liznarr
 Are there any drawbacks concerning Lease/Purchase options? They just seem like the way to go as opposed to throwing away money on rent.
 If I plan on moving away and out of the home in the future, would Lease/Purchase still be favorable?
 I would appreciate if you would advise me of any "things to be aware of", vital papers to be signed, or legalities involved in these type of contracts. Thank you very much.
 Michael D. Eidson, LAc.

Answer
Hi Mike,

For a Lessee/Tenant/Buyer, a Lease-Purchase could be advantageous when there is a definite NEED to delay a closing … such as waiting for money for a down payment to come in, from…whatever (or additional time to save enough money for a down payment), or when there is a credit problem that needs to be cleared up and a buyer needs time to clear his/her credit.

For a Lessor/Landlord/Seller, a Lease-Purchase could be advantageous when a property has been for sale for a long time and has not sold (due to overpricing, condition, location … or a combination of the preceding).

The disadvantages of a Lease-Purchase …

For a Buyer:  With interest rates still at almost all-time lows, delaying a closing could cost additional money every month during the life of the loan.  A remote possibility could be a dishonest Seller who might collect rent every month, not make the mortgage payments, and let the property go into foreclosure … or a Seller could file bankruptcy.  When title to property changes due to foreclosure or bankruptcy, a Lease-Purchase agreement probably would be worthless.

For a Seller:  A buyer may never get his credit straightened out or save enough money for a down payment, and the Seller would have continuing delays in getting his equity from the property.  Additionally, a tenant could damage property and not have resources to pay for repairs.

I've been in the real estate business since 1984, and I have never had a Lease-Purchase agreement go to closing.  Maybe I just had bad luck with them, but I will not even entertain the idea of drawing up another Lease-Purchase.

A QUALIFIED buyer who wants to own property would normally not consider a Lease-Purchase – a delayed closing, maybe, but not a Lease-Purchase.

Likewise, a Seller who has a desirable property for sale and wants to cash out equity or be relieved of the responsibility of the property would have no benefit in entering into a Lease-Purchase … especially when considering the risk of tenant-caused damages and a possible non-closing.

Should you, however, have your own reasons for wanting to enter into a Lease-Purchase, on “your” side of the transaction you should consider the following before doing so:

1.   Who will be responsible for the payment of taxes and insurance until closing?
2.   You will probably want a fire dwelling policy until you close to cover your personal contents as a “lessee.”
3.   Have a good Realtor or an attorney draw up a Contract of Sale (with the closing date stated) as you would normally do with all the usual protections for you as a Buyer.
4.   In addition to the Contract of Sale, you will want to execute a separate Lease agreement, tied into the Contract of Sale.
5.   Will any portion of the lease payments be applied to your down payment?
6.   Address the issue of a home inspection NOW, also a wood infestation report and water damage report, as well as a clear heating and air conditioning letter.  If there are any severe problems with the house, you want to ask a Seller to correct them NOW.  Hereafter, you can see that everything is maintained so that at closing you will not have any surprises.
7.   Ask for a copy of a recent survey so that what you “think” you are buying is what you “will” be buying.

The above should get you off to a good start.  Again, a good Realtor and/or attorney in your area should be able to help you.  I would not recommend your trying to draw up this kind of paperwork on your own.

As far as if you plan on moving away and out of the home in the future, would a Lease/Purchase still be favorable—it would depend on WHEN you plan on moving and whether or not you would then keep the home as rental property.  If you actually went to closing and sold this property within the first year, unless you expected a huge increase in the property value, you could actually lose money if you had to pay Realtor fees and/or had a good bit of closing costs you paid at time of purchase.

I hope the above is helpful and points you in the right direction.  Feel free to write again if you have additional questions, and don't forget to rate my answer.

Regards,

Elizabeth Narr