What is a Lease Purchase?
A Lease Purchase is a technique used to sell a house quickly in a slow real estate market. It is essentially a hybrid between an normal sales agreement, or contract to purchase—with an established sales price, financing terms, and date of closing—and a lease, which provides for the use of a property during a limited term in exchange for rent. A properly structured Lease Purchase agreement includes the purchase price, the amount of initial down payment, the length of the interim lease, the rental amount, and the amount of rent to be credited at closing to the purchase price .
Why Lease Purchase?
The Lease Purchase has several benefits for the seller. Primarily, it is a technique that is used to attract buyers quickly—in most cases within three weeks or less. How? We have found that there is a ready supply of buyers in all price ranges who need housing now, but are not able to close immediately. For them, the Lease Purchase is the chance to work out circumstances which temporarily prohibit a conventional sale. Examples are job transfer (completing a sale in another state), concluding a divorce, repairing or improving credit, saving down payment— or just a need to move quickly before a pending mortgage approval can be completed. The appeal is that very few properties are offered in this manner in better neighborhoods. Also, because the Lease Purchase is an unusual approach it attracts a lot of attention, and thus gives the seller an edge—especially if there’s a glut of homes in his price category. In several cases we have sold homes conventionally to buyers who would not even have noticed them if they were marketed “for sale” only.
The Serious Buyer.
Option funds are the nonrefundable monies the buyer puts down up front—usually 2% to 5% of the purchase price. The larger the amount of the option funds, the more commitment on the part of the buyer—and the more confidence the sellers have that they’re entering into an agreement that will close as scheduled. In addition to this down payment, all prospective buyers should complete an application and be pre-screened, with an emphasis on establishing their qualification for future financing which will be needed at the end of the option period. Not all prospects should be accepted.
One of the most common questions we are asked is “what if the tenants tear up my house?” It could happen. We have been renting homes for 20 years and have not yet had that experience. The experience we have had is that properly screened tenant-buyers in a Lease Purchase take excellent care of the homes they are buying. (In some cases even making improvements to the property, with our pre-approval.) In addition, under our program buyers agree to perform all routine maintenance and repairs up to a specified dollar amount, so the seller is not involved in normal property maintenance.
What happens at the end?
When the tenant buyer has qualified for his financing, the paperwork should be forwarded to an attorney for closing. In the event that circumstances change and it does not look likely that the selected buyer will close, our lease and option agreement allow the owner to begin showing the home for sale 90 days before the lease period ends. In addition, with the seller’s agreement, we allow for the free assignability of the purchase contract, (but not the lease). In essence, this means that if the tenant-buyer would help us show the property and find someone else to complete the sale, they could recover their downpayment money at the final closing.
Lease Purchase Advantages
- Quick solution to the expense of paying carrying costs on an unwanted house — especially through the months it may take to find a conventional buyer, and for that buyer to get a loan and close the sale.
- Very few properties are offered on a Lease Purchase basis in better neighborhoods consequently the demand far exceeds the supply.
- The sale contract is signed at the same time as the lease and option, so that all of the terms of the purchase are decided in advance.
- Mortgage payments are partially or completely covered by incoming rent payments.
- The decision to invest the option fee is not taken lightly, and buyers therefore bring a strong emotional and financial commitment to complete the purchase.
- Tenant-buyers make excellent trouble free tenants, (meaning little seller involvement until closing).
- All normal maintenance is the responsibility of the tenant-buyer, up to a pre-agreed dollar limit.
- Resolves questions concerning lapse of insurance coverage on a vacant property, (usually after 30 days).
- Tenant-buyers are pre-screened, including employment, credit, and landlord verifications. An emphasis is put on factors restricting their ability to get a mortgage now, and and what improvements will be needed.
- Seller remains in title until closing.
“I was amazed at how well it worked. We found a tenant-buyer in a few weeks. What would have been months of downtime was turned into cash flow and a well maintained home. We closed in a little over 12 months, exactly per the terms in the agreements.”
— Joseph Griese, Evanston, IL
“Well now I am a believer, in less than 2 weeks he had someone interested and in two weeks we had a signed contract.”
— Don Meewes, Naperville, IL
“He also stayed available with any extra help until we closed 11 months later. Walter not only helped us sell our home, but made it so that we were able to make a profit, which we wouldn’t have going through a realtor. Our only regret is that we didn’t call Walter sooner.”
— Larry Aspland, Aurora, IL