Lease Purchases have always been an option in the real estate market, but with today’s market they are becoming more and more common. Most buyers and sellers do not know what they are, how they work, and whether they’re a good option. Here’s a brief explanation of the basics.
For the purposes of this post, when we talk about a Lease Purchase, we are not referring to a Lease with Option to Purchase. That is a very similar option out there and is exactly as the name implies, a lease contract with an option to buy later.
What is a Lease Purchase? The thing to remember with a Lease Purchase is that it’s basically a Purchase Agreement and a Lease Agreement rolled into one. All details of both the purchase and the lease are clearly spelled out from the beginning. The purchase price, inspection dates, repairs, lease terms, occupancy date, close date, rent credits, downpayment, late fees, and so on. It’s also important to have a Real Estate Attorney draft such a document to make sure all details are covered.
Why would a buyer want a Lease Purchase? The most common reasons a buyer would opt for a lease purchase vs a straight purchase is because they cannot qualify for financing to purchase now, or they do not want to commit to purchasing a home.
What are the Risks/Benefits for Buyers? The biggest benefit for buyers is the ability to lock in a great home at today’s price. Remember, with a lease purchase all terms are typically spelled out in the contract up front, and purchase price is one of those details. In today’s market, where most areas of the country are at rock bottom values, you get to lock-in that great price and close at a later date. If values go up prior to closing, the buyer still gets the agreed upon purchase price. For the buyer who cannot currently qualify for a loan to purchase today, they also get to lock-in the price, lease a home they know they want to buy, and once they’re able to qualify for financing, they close. For the buyer who wants to get to know the area more before buying, they can also lock in today’s price. If they decide the area doesn’t fit their needs, they can choose not to close and forfeit their deposit(s).
The risks for buyers in both situations is simple. Until the buyer closes on the home with their own financing in place, they are at the mercy of volatile mortgage interest rates. If a lease purchase closes 12 months later, rates could be significantly different. It’s hard to imagine that rates will go any lower, so the risk is high. The second risk is that the buyer doesn’t get any tax benefits for mortgage interest deduction until they own the home with their own financing in place. Third, if values drop further and the purchase price was already agreed upon, the buyer cannot renegotiate. When considering all benefits and risks of a lease purchase, a buyer should definitely consult their real estate professional, a real estate attorney, and tax advisor.
What are the Risks/Benefits for Sellers? The biggest benefit for sellers is they get a contract on their home, and have someone paying them a lease payment until closing. The risks for sellers are a little more complex. First, until the buyer closes on the home on the agreed upon date, the seller is still the owner and in most cases will have a loan that they are responsible for. Second, the seller likely prepared their home for sale, bringing it to tip top shape. If the buyer doesn’t close, the home will need to be returned to tip top shape at the seller’s cost. Third, if the buyer stops paying their lease payments, the seller is stuck with having to remove the buyer/tenant and will once again have to worry about selling their home. In both situations where the seller must put his home back on the market, they are also now at the mercy of the current market conditions. For all these risks above, the more a seller can get in the form of non-refundable downpayment, the more they reduce these risks. Most attorney’s will advise you that lease purchases have a very high risk of never closing, however the success rate really depends on the parties involved and the terms of the agreement. The more “tight” the agreement, the more the odds improve. Just like a buyer, a seller should definitely consult their real estate professional, a real estate attorney, and tax advisor.
Have additional questions about Lease Purchases, what they are, and whether they are right for your situation? Visit our team at www.bovenderteam.com
Do you have an experience with Lease Purchases? We’d love to hear your thoughts. (posted by Andy)