Lease Purchase Benefits and Risks
Weigh Your Options
Rent Robin started doing Lease Purchases in 2001 in response to the increasing demand from buyers who wanted to buy a home but were not quite able to qualify for a mortgage. We stumbled through our learning curves and have developed an excellent understanding of the issues. We are happy to teach classes to any organization that would like to know what we have found out through experience.
A Lease Purchase is a contract, between a buyer and seller, to sell a property with a delayed closing.
The contract forms are very similar to the ones used in a normal selling situation. In the purchase agreement all of the issues of the purchase are addressed including price, financing, taxes, termite bond, title exam, warranty deed and disclosures. No Detail is ignored. The closing date, maintenance and possession issues are the only items that are different. The closing date is agreed upon between parties (usually 24 months). Maintenance is handled by the tenant and possession is addressed though a traditional rental agreement.
- Leases are Long: Regular tenants will sign a 12 month lease. A Lease Purchase tenant needs two to three years to clean up credit, save up the down payment or gain the employment tenure necessary to meet lender requirements. Long leases eliminate the expenses that accompany vacancies. If they do not close, you have had a long-term tenant and reduced vacancy time. Moving is expensive, and all parties benefit from a longer lease.
- Maintenance Expenses are Reduced: In a Lease Purchase agreement the tenant takes responsibility for all maintenance. This can save the owner money and grief, and allows the tenant to experience the home ownership benefits and responsibilities.
- Deposits are Larger: While an ordinary tenant deposits one month’s rent as a security deposit and is fully refundable and held in the broker’s escrow account. A Lease Purchase tenant typically deposits two to four times that amount. This money is called (NON-REFUNDABLE) EARNEST MONEY and is disbursed at time of move in. When the tenant closes, his earnest money is credited toward the purchase price.
- You Receive Full Price: Price is always negotiable but when buyers get “terms” (i.e. two years to close) they seldom negotiate on price. Since they have fewer houses to choose from they are less focused on price and more focused on terms.
- Closing Costs are Lower: Closing costs are always negotiable. When you are offering “good terms” you seldom have to pay closing costs. Keep in mind paying some closing costs improve the chances of closing.
- Better Care of the Property: Generally tenants will take better care of the property if they anticipate owning it. They tell neighbors they are the owner and settle into the community. Option still inspects regularly to insure proper care of the property.
- Sell Without a Long Vacancy: One big expense of selling an investment home is the cost of getting it in selling condition and keeping it that way until closing. Mortgage payments, insurance, taxes, utilities, paint, carpet, lawn care and the risks associated with an empty house can cost you plenty. These costs are dramatically reduced by getting someone in quickly. They pay rent right up to the day of closing and there is no vacancy.
- An attorney prepare all lease/option/purchase contracts.