Real Estate Investing

Back in the dark ages when I first started house hunting, I explored the possibility of buying through a lease-purchase option.  I had great credit and a decent income, but very little money saved for down payment.  Because these were the dark ages, there were no down payment assistance programs NOR seller paid closing cost programs.  This is why the American Dream of buying a home seemed so far-fetched and nearly impossible years ago.

When my husband and I met with the builder offering the lease-purchase, he said he needed $2000 down and our monthly payment would be $750.  The $2000 was nonrefundable and of the $750, only $50 of that would be applied to our future downpayment and closing costs.  I was somewhat appalled because I just didn’t understand how so little was applied back to us.

Today, it seems very logical.  When a seller offers to lease-purchase their home they take a big risk in their buyer.  The down payment, in my opinion, should be 5 to 10 percent - not just a thousand or two.  And it should be nonrefundable should the buyer or leasee walk away from the home. 

The seller is essentially taking the home off the market - removing it from another potential buyer for the duration of the lease.  Further if the buyer decides not to buy and damages the home, the seller has the funds available for repair and replacement costs.

A big nonrefundable down payment will also be a disincentive for the buyer to walk away.  It will give a buyer a good reason to follow through on their promise to buy.

The next issue that bothered me was the fact that so little of my “rent” was actually applied back to me.  In hindsight, that was my own personal stupid tax.  Of course the seller is going to keep most of it!  They still have to pay their mortgage every month and the rental amount is applied toward that.  If you lease purchase a home and add extra to the top, then that amount can go toward your down payment or closing costs.

In conclusion, if you are considering a lease purchase be prepared to put a significant amount of money down for deposit and don’t expect your monthly rent to come back to you.  A lease purchase option can be good if you have only about a year of credit repair remaining and if you’re sure you want to own the home once you’ve lived there for a year.

The escalating rate of home foreclosures is turning more homeowners into renters, but it’s also turning more renters out of their homes. One aspect of the foreclosures crisis addressed recently by USA Today is renter eviction because the landlord defaulted on the home loan. Many of these unfortunate renters recently went through the foreclosure process themselves, so this is doubly traumatic.

Rental units are at an all-time premium now, because demand is high and so are rental rates. So one can imagine how immensely difficult it must be to have the hard-won rental property yanked out from under foot. About 18 percent of foreclosures started in 2007 involved “non-owner-occupied homes,” USA Today reports, citing a Mortgage Bankers Association study.

Maryland Real Estate Blog points out that renters who have signed a lease-purchase agreement with higher deposits are in an even worse position than the typical renter.

“They are in the unenviable position ‘between a rock and a hard place’ — with a lease in place that requires them to stay and continue making payments to the landlord; unable to move to another property without losing their substantial security deposits.”

Although renters obviously aren’t accustomed to doing background checks on the landlord, some limited form of that may be a necessary thing nowadays. Checking whether the loan on the rental property is in default can save a lot of trouble and heartache down the road.

Just as a lease-purchase has pros and cons for home buyers. Generally speaking, this is a good deal for the property owner. But take a look and decide for yourself.

Pros of lease-purchase include:

-High demand: Especially with the current housing situation, rentals are in high demand. And there are plenty of affluent would-be buyers whose credit is simply in disrepair at the current time. The flexibility and “no bank involvement” that lease options offer is always appealing, but especially right now. So there’s plenty of consumer demand and those consumers have no negotiating power on the monthly cost.

-More profitable: Because tenants are putting extra money above monthly rent toward a downpayment on the house, property owners can come out well ahead profit-wise.

-Quality tenants: Because these tenants are putting extra money each month toward owning the home, they have already developed a sense of pride in ownership. Their sense of attachment to the property will encourage them to take care of it.

The cons of lease-purchase include:

-Price lockdown: The home price is negotiated and put in writing on the front end of the deal, so if anything occurs in the area to cause property value to skyrocket, it’s too late. If the tenants want to follow through and purchase the home at the originally agreed upon price, the property owner has to abide by the terms of the contract.

-Deals fall through: Many lease option renters underestimate their ability to buy a home in a year, two years or five years. They simply will not be able to make it happen. Sometimes, living in the home will uncover features that they don’t like. Maybe the neighbors are too loud, and the tenants decide they will not purchase the home after all.