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Lease Purchase
Old 09-19-2007, 11:12 AM   #1
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Lease Purchase

Has anyone sold their personal residence under a lease purchase arrangement. What are the legal land mines ? Any horror stories or should haves? Any vignettes to share/ offer. Planning to have all paper work done by a real estate attorney, but want to go in asking the right questions etc.
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Old 09-19-2007, 11:16 AM   #2
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Are you talking about a ground lease (where you sell and don't live in the house anymore), or a sell-lease back arrangement (where you lease back from the purchasers)?
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Old 09-19-2007, 11:37 AM   #3
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Ground Lease (I'm leasing to the purchaser)
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Old 09-19-2007, 11:52 AM   #4
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My question for the OP is....

Why would you consider this arrangement ?

If prices go up, are you locked into some fixed (but low) price ? If prices continue to fall (freefall), as many predict, you can't sell cause you are locked into leasing out your house.

What exactly is the advantage (to you) of such an arrangement ?
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Old 09-19-2007, 12:24 PM   #5
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My experience with lease/purchase is in municiple purchase of high cost equipment. It is a benefit to the buyer, through spreading out the high cost over time. This is paid for with a higher price (finance charge). Benefit to the seller is more money in the end and inventory keeps moving. Or a third party ("the bank") handles the financing and the seller just takes the selling price from the bank.

I haven't got a clue as to why this would appeal to a seller for a residential sale.
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Old 09-19-2007, 02:53 PM   #6
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I would suggest either sell it outright or rent it outright. The lease/purchase leaves you (the seller) in a potential losing position, unless you get a very substantial down payment (which will seldom happen since the one leasing it doesn't have the funds), set some very clear time frames, do not set the net rent too low (do not credit too much to the potential buyer's equity). As already mentioned, if the market goes up you, the seller, could lose potential profit; if the market goes down your potential buyer will probably walk away on you, leaving you in the EXACT position you find yourself now (not to mention a period of additional "ware and tear" on the property).

I do not know about all of the "legal" pitfalls but somehow "you can't get blood out of a turnip" comes to mind. I guess these arrangements work sometimes but it has been my experience (watching a couple from the sidelines) that most never work out very well for the owner of the property. Even a "contract to purchase" would be safer for you IMHO as you could get a decent down payment and have probably a much better legal position for possible repossession.
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Old 09-19-2007, 03:59 PM   #7
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Tried to push lease options on my "good" tenants ... nobody was interested in paying 4-500/mo ABOVE market rent for the option of buying at todays price. The concept of saving for the purchase (4-500/mo) eluded them.

Did carry paper for one tenant (1st position) who bought the property . Prices proceeded to increase 3 fold over the next decade. Never missed a payment. Still get an annual phone call thanking me "helping" him. The experience made me realize he has alot to be thankful for: if the price dropped, he walked; when the price increased ... my loss, his gain. Only benefit to me was collecting a little more with NO headaches.
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Old 09-19-2007, 04:08 PM   #8
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It's kind of like selling covered call options...

There is no upside potential. You have all of the downside potential and problem potential.

And very little "extra" income.

So that's a game I won't play.
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Old 09-19-2007, 04:28 PM   #9
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I have never done this, but from what I have read it seems wrong to dismiss a lease purchase as having "no upside" for the seller.

I think the idea is to structure the lease option agreement so you have a premium on the purchase price, the purchase option expires after one year, the option deposit is nonrefundable, and rent is over market price (with the excess going toward the purchase price). Add in a few extra bonuses, like a) you avoid paying realtor fees on the sale, b) tenants are responsible for basic maintenance, and c) since they tend to view themselves as owners, tenants treat your property with more respect, and it seems like there can be plenty of upside.

The above is all theory as far as I'm concerned, because as I mentioned, I've never done one of these, myself. But that's the way it's supposed to work, I think!

Tryan, if your tenant had walked, wouldn't he have forfeited his option deposit and all the "extra" rent money?
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Lease option
Old 09-19-2007, 07:05 PM   #10
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Lease option

Actually it could be beneficial to both the buyer and seller. We are in the process of offering that possibility now. A good site with real estate info is www.thecreativeinvestor.com.

A lease option should actually be 2 contracts, one to purchase and the other to lease. This way the buyer can't claim any type of equity in the property until they have exercised the option (I've read that it has been a issue in the past in Texas).

A standard option fee is 5% of purchase for property under 250k and 3% for property over. The option fee locks the buyer into a price within a specified period (normally 1 year). If they don't exercise the option they lose the fee.

Interest we had was from someone who had just started a company in medical staffing and wanted to get more established before they purchased. Our property provides 2 buildings, one would be the home and the other a professional office. They were interested in paying the option fee and renting until they were ready to purchase. They wanted to keep cash flow for paying their nurses.

Another wanted to arrange it this way so they could take the time to move their business, sell their own property and then apply the proceeds to their mortgage when they exercised the option. It gave them time.

Our arrangement had an option fee but the lease was strictly for rent, none of it went towards the purchase price. This helps keep the monthly amount lower for the buyer and doesn't intermingle the 2 contracts.

If done right, this is another financing option dependant on the buyers and sellers situations.
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Old 09-19-2007, 07:31 PM   #11
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Masterblaster,
The aim is to do a 12 month lease purchase (not lease option); in a soft real estate market where you're not expecting a tremendous increase in property values over the lease holding time (12 months in this case) can be advantageous in improving a property holders holding cost. It also as you've mentioned locks in the purchase price, puts the maintenance costs on the lessee and with the upfront deposit (nonrefundable) creates a better overall situation than a lease option (which gives the lessee an out).
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Old 09-20-2007, 01:37 AM   #12
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My opinion -- I would not consider leasing it with an option to purchase. Two reasons:

1) Assuming the The prospective buyer would like to actually purchase the house. They would probably only enter into the agreement if they had bad credit or could not acquire the loan. Otherwise, they would just get a loan.

2) The person is likely to not ever be able to afford to buy the house without you financing it. THey culd just mess the place up and now you are back where you started but have to fix it up to sell again.

If you do not want to be a landlord... Just try to sell the house. If you cannot get your price, maybe you can wait a bit till the market firms up. If you are pressed for time, cut the price and sell it.
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Old 09-20-2007, 07:51 AM   #13
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Quote:

Tryan, if your tenant had walked, wouldn't he have forfeited his option deposit and all the "extra" rent money?
If he walked I was left to foreclose since I sold him the unit. And with no equity (that's why he walked) the loss: equity, fees, rehab, vacancy ... was all mine.

Not sure why anyone would agree to an above market price in a soft RE market ... that one eludes ME.
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Old 09-20-2007, 04:22 PM   #14
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If he walked I was left to foreclose since I sold him the unit. And with no equity (that's why he walked) the loss: equity, fees, rehab, vacancy ... was all mine.
Oh, I misunderstood you, then. I was thinking about a case where a tenant has put down an option deposit but hasn't actually exercised it yet. In that case, if the tenant walks, he loses the deposit and you simply keep the cash and rent it out to the next tenant. If he wants to exercise the option, it's up to him to come up with financing for the agreed-upon price.

Quote:
Not sure why anyone would agree to an above market price in a soft RE market ... that one eludes ME.
I guess the idea is that lease options appeal to people who have bad credit and can't otherwise afford to buy a home. These people would be more likely to sign a lease option at an above market price (but not ridiculously above, of course) because they want the home and they just need some time to improve their credit.
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