Charlotte Homes: I Think A Lease Option Is A Better Choice Than A Lease Purchase

I Think A Lease Option Is A Better Choice Than A Lease Purchase

So often in this market I get calls on my listings and the person on the other end wants to talk about a lease purchase...or they are looking at rental property and want to turn it into a lease purchase.  As soon as I hear this I know the callers intentions...they want to get into a house at today's purchase price and interest rate but they don't have the credit or down payment for the loan...or maybe they have a house to sell and cannot afford two mortgages.

Reasons buyers/renters should steer clear of the Lease Purchase

1. The seller may not keep up the property because they think that by the end of the lease it will no longer be their problem.
2. The seller could stop making the monthly payment and the house could be foreclosed on.
3. Any improvements that the buyer/renter makes to the property is technically the property of the seller until it closes...and most of the time lease purchases don't close.

Why do buyers/renters want to do a lease purchase and what are the risks?

1. Buyers think that their credit will be better in a year (or end of lease term) and that they will be able to obtain the loan needed to purchase the home.   RISK is that the buyer is unable to fix their credit in a year and then the buyers lose their earnest money and the seller is forced to clean the property back up to either look for a new tenant or market the property for sale.
2. They have another house to sale.  What if the buyer/renter's home still hasn't sold at the end of the lease term?  If you are in a lease purchase and are in this situation your best option may be to go ahead and reduce the list price of your other home so that you can continue with your next purchase.
3. Buyers want to test out the neighborhood and think that at the end of the lease term that they have the "option" of purchasing or walking.  The buyer/renter needs to know that if they are signing a lease purchase that they are signing a legal agreement to purchase the property. 
4. Most lease purchasers think that their monthly rent is buying down their purchase price.  In most cases the money is just going towards the sellers down payment and the buyer's price is not being bought down at all.  It is not uncommon for the monthly rental rate of a lease purchase to be higher than fair market rent for the same house because the seller's mortgage payment could be more than the fair market rental amount.

If you must do a lease purchase please at least do the following:

• Sit down with an attorney and have them write the contract and make sure that both parties understand and agree to what will happen at the end of the lease term.
• Complete an inspection ahead of time and go ahead and negotiate the repairs.  You need to know the condition of the house before doing a lease purchase because it is a binding contract.
• Have the seller provide you a home warranty.  In case the seller stops taking care of the property, the home warranty should cover most major issues.
• Have the property appraised so that you are more confident at the end of the lease that it will also appraise again for you to obtain the loan.
• Make sure the seller keeps the property fully insured during your lease time.
• Neither party should make any physical changes to the property unless everything has been agreed upon in writing.
• HAVE AN ATTORNEY EXAMINE THE TITLE...there may be a reason the seller wants you to lock into a lease purchase.

Instead...Just Use A Lease Option

If you decide to do a lease option, then at the end of your rental agreement you will have the first option to purchasing the house.  The price will have already been negotiated and you will have the right at that time to either move forward with obtaining a loan and buying the property or you can walk away.