Let’s start by talking about the differences between a lease/purchase and other types of purchases…
*A Lease Agreement with an Option to Purchase is simply a rental and at the end of the rental period the renter has an option to purchase the home. No rental money goes toward the purchase price.
*The traditional way to make a purchase is to get a loan through a bank, write a contract on a listed home, complete inspections, and close on the home within 30-90 typically.
*Some Sellers have the ability to do Seller Financing, because their home is paid off or they have a bit of equity in their home. In this case, the loan is through the seller. The Deed of Trust is recorded at the courthouse just like other loans and the title is transferred to the buyer. These loans are usually for a short period of time until the buyer can get a traditional loan through a bank. The seller still has the right to foreclose on the propety if the buyer defaults.
*A Contract for Deed is when a Seller holds the deed for the property while the buyer is making payments. There is nothing recorded, just an agreement between buyer and seller. The problem here is that the seller holds all of the authority and could change his mind, etc and the buyer is out of luck.
*A Lease/Purchase is when the buyer can not make the purchase at this time with a traditional mortgage. Typically, lease/purchases are utilized these days because the buyer has another home they are trying to sell out of state or they have some credit issues they need to work on. Lease/Purchases usually last a year or two. The buyer pays an upfront non-refundable fee to the seller, that will be credited at closing to the buyer toward the purchase price. They pay rent by the month to the seller. Usually a small portion of the rent is put toward the purchase price. Purchase Price, Closing date and inspections are all completed prior to the buyer moving into the home.
Lease/Purchase Agreements are drafted by an attorney and the Offer to Purchase part of the agreement is drafted by your real estate agent. All conditions must be ironed out up front… How long will the lease/purchase be in place until they close, Rental amount and portion to be put toward the purchase price, purchase price, closing costs, pets, commissions, etc.
The Lease/Purchase Agreement drafted by the attorney nails down all of the specifics during the lease period and that the buyers non-refundable, upfront payment will belong to the seller should the buyer not close. The Offer to Purchase written by the real estate agent works like it would with any other type of contract….the purchase price is spelled out, home inspection and loan approval dates, repair negotiations, etc. Both the Contract and Lease/Purchase Agreement are signed at the same ime by the buyer and seller.
The buyer should be working with a lender in advance to assure they will be prepared to close at the date set forth in the contract. The buyer also needs to assure that the lender will allow the non refundable deposit to be used toward the loan on the HUD (Settlement Statement) at closing.
The Seller may be requested to pay some sort of commission at the time the lease/purchase and contract are signed due to the work required prior to the closing and the rest of the commission would be paid at closing.
The seller needs to be sure that their homeowner’s insurance will allow for a tenant or the buyer to live in the home and that their current mortgage company is also ok with the lease/purchase. Mortgage companies could utilize the “Due on Sale Clause” and this will require the loan be paid in full at that very moment.
The buyer should complete their home inspection prior to moving into the property, negotiate repairs with the seller and the seller should complete repairs prior to the buyer moving into the property. This is both protection for the buyer and seller.
If the buyer were to default and stop paying the seller would still have to go through getting the buyers out of the property, which could take 45-60 days of their personal time and money.
In these uncertain times, what if the seller stops making their mortgage payments? It might be a smart idea for the seller to send their payments to the attorney, so the attorney can assure the payment is being made and they will forward the payment to the mortage company. If a seller defaults on their loan, there is little protection for the buyer. The Lease/Purchase will address these issues.
The Buyer may also want to request a Title Search up front and every 3 months or so after to assure there have not been any liens put on the property. No one would want the seller not to be able to sell the home at closing due to an unexpected lien the seller is unable to pay off.
Be sure to negotiate up front who will make repairs that come up during the time the buyer lives in the home. Often sellers do not want to make these repairs, because they do not wish to play the part of a landlord. If the buyer were to make repairs during that time period, be sure to have the attorney to write into the lease/purchase that the buyer must have written consent from the seller to make any specific changes or repairs and show proof of payment. If the buyer were to call out someone to make a repair and not pay them, this contractor could put a Mechanic’s Lien on the home. If the buyer defaulted on their payments to the seller, the seller could get stuck with this lien.
As the buyer, be sure a Memorandum of Lease is recorded at the courthouse. Let’s say market conditions improve and the seller can sell the home for more money as the closing with the current buyer approaches, no one would realize that this property is tied up if the seller tried to sell it to another buyer at a higher price if this information is not recorded.
Usually this buyer is going to treat the home much better than your typical tenant, which is a plus for the seller.
With all of this said, very, very few Lease/Purchases actually close. For the seller it can often be a headache, but in this market, it could also buy them some time until the market improves.
Have other questions? Feel free to call me!