Posted by The Keen Team on Wednesday, February 26th, 2014 at 3:09pm.
Over the last few months I've had a number of past clients ask me whether a "lease purchase" would be viable to help them sell their home. Though it's not right for everyone. it can be a win-win real estate deal, and it can help solve a serious problem for today's frustrated sellers.
Here's how it works:
In its simplest form, a lease-purchase agreement is nothing more than a written contract to purchase real estate over an extended period of time, typically not exceeding 36 months. It is usually coupled with an agreement to allow the purchaser to occupy the house and pay rent on it while he is completing the purchase.
In contrast, a lease-option agreement is primarily an agreement to rent real estate. That agreement contains a provision granting the renter the option of purchasing the real estate at some point in the future if he so chooses.
Here's why it's working today:
Traditional lenders have tightened underwriting guidelines and raised minimum credit standards, and there are lots of first-time buyers who have been pushed out of today's buying market. A lease containing an option to purchase may give the buyer enough time to get qualified and make the purchase he or she wants.
In today's market, some sellers are willing to compromise on a quick sale in order to get some revenue coming in to help cover the mortgage payment.
Typically, a lease-purchase agreement includes these features:
• A complete rental agreement outlines the relationship between the resident and the owner. This can be the same rental agreement that you might use if you were simply renting for a specific term, then intending to vacate.
• If this is a lease-purchase, there will be a simultaneous contract for the purchase of the property, specifying the price, the "on or before" closing date, and the other terms and conditions of the sale. In this contract, a non-refundable "down payment" is often made from buyer to seller. This down payment is usually applied toward the purchase price.
• If, instead, this is a lease-option, then there may or may not be any "down payment," and it may or
may not be refundable, depending on the agreement. As an alternative, the lease-option agreement may specify a more traditional (and refundable) security deposit.
• A common feature of almost all these agreements is a "rent to own" provision. This clause specifies that some portion of each rental payment shall accrue toward a reduction in the purchase price of the property, even if that price has yet to be determined.
A small provision might be a monthly credit of $100, to be accumulated by the owner for use as a credit against the purchase price of the property. A more generous offer might be a credit of $400 per month, allowing the renter to build a sizeable down payment of almost $5,000 for each year of rental.
I have even heard of sellers so highly motivated to cause a sale of their home that they offered a credit of 100 percent of all rents paid as a credit against the purchase price. Obviously, a seller in this category would need sufficient equity in the property to cover such a generous offset. But it would have the further effect of almost guaranteeing an eventual sale. What smart buyer would walk away from a $24,000 credit after two years of renting?
• Another typical feature of these types of contracts is a provision asking the renter/purchaser to inspect the house as they move in and agree to accept it in "as is" condition now. This is to prevent the renter from damaging the house, then asking the seller to make repairs prior to the sale.
• Additionally, the agreement typically also makes the renter responsible for all repairs during the life of the lease and until the purchase occurs. The idea here is that since the buyer is going to buy the house, he can take on the responsibility for upkeep now. However, this provision may not be enforceable under Georgia law, which prevents the owner of residential rentals from transferring the responsibility to repair. I'd better leave that one to the attorneys to sort out.
Ben & Joshua Keen (aka The Keen Team ) are a full-time real estate consultants helping buyers, sellers, investors and landlords in the Intown Atlanta real estate marketplace. They're brothers, investors & entrepreneurs.