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Lease with Option to Purchase Contract
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Posted by equinecpa (My Page) on Sat, Mar 28, 09 at 12:01
| I have a rental property that I'd like to sell. I have someone who is willing (if we can come to terms on a contract) to rent to own. We are meeting on Monday to work out some terms.
Obviously I'd like to be as prepared as possible for our meeting.
I'm looking for input as to what are "normal" terms in such a contract. I'm looking to charge this tenant fair market rent on the property and then credit about 20% of his rent payment to the purchase of the house should he exercise the option to buy. The lease term will be 2 years.
In return for me foregoing 20% of the rent - he will be responsible for the repairs.
In my research I've seen 1%-5% of purchase price as the price of the option. Is this the norm? I'm thinking 2 months rent which would be just about 2.5%.
On Monday, I plan on presenting my proposal, obtaining a deposit and permission to run a credit check. What authorization do I need to run a credit check? Can anyone recommend a good service to use?
Am I missing anything?
Thanks
Carolyn |
Follow-Up Postings:
RE: Lease with Option to Purchase Contract
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RE: Lease with Option to Purchase Contract
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| Yes the RE Lawyer will come in but only once we have a contract "ready". No point in paying legal fees if we can't come to terms on a contract. |
RE: Lease with Option to Purchase Contract
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| "No point in paying legal fees if we can't come to terms on a contract." No point in trying to negotiate a contract without knowledge of the pitfalls either. |
RE: Lease with Option to Purchase Contract
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| Basically, I would not have either party sign anything without a lawyer checking it out first. Once the buyer signs it, and then if the lawyer finds anything, it could end up in the court and you could loose the house. |
RE: Lease with Option to Purchase Contract
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| Does anyone have any suggestions on terms, credit checks etc as asked above? |
RE: Lease with Option to Purchase Contract
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| I once was the tenant on the tenant side of a rent to buy. I worked with a lawyer and we drafted the contract, and I took all his suggestions. As the tenant, I requested that 100% of my rent go to the down payment and I requested that the owner pay all repairs and taxes during the rental period. The option period was a standard one year. Because I knew the owner, there weren't credit checks. Once we presented the contract, the owner didn't read it very closely and signed it with those clauses all in place. I got a nice deal! Depending on how agressive you are in wanting to sell, you may need to be alot more flexible than what you are indicating. |
RE: Lease with Option to Purchase Contract
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| They are going to be a tenant, so all the regular checks. While they may ask for a 100% rent credit, I have never agreed to anything that high. Renting to own is not without some risk to the owner. You will be agreeing to a price now for a sale that could occur in the future. |
RE: Lease with Option to Purchase Contract
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| I met with the potential lease to buyer. Very nice couple. They were very open about their bad credit and why it is bad. Signed credit check forms so I can pull credit if I like. They'd like to rent to buy. They'be paying me approx 77% of Fair market rent. No money down. They'd take care of repairs and do plan on improvements. Would sign an option to buy for asking price today. Does anyone have experience with rent-to-buy and bad credit becoming good? I'm wondering if this is worthwhile pursuing as I don't want to be stuck with this house long term. What does it take to make bad credit good? |
RE: Lease with Option to Purchase Contract
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| From a mortgage perspective ... these are Fannie Mae's "Rent to Own" guidelines: Rent with Option to Purchase
Under a contractual rental/purchase agreement, the portion of rental payments that exceed market rent can be considered as part of the down payment. A complete, documented history of payment and receipt of the rental payments will be required in addition to a copy of the lease agreement. The appraiser must develop a market rent figure through a single-family rent schedule. As for their credit, it depends on too many things ..some of which, how bad is their credit? Can they keep their credit clean? Do they have a reasonable explanation for their credit problems, or is it just the way they live? It can take 1 to many (7 to 10) years to clean up and re-establish credit. |
RE: Lease with Option to Purchase Contract
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| "Signed credit check forms so I can pull credit if I like." Have them pull a copy and give you the sealed envelope when it arrives. I have always found referrals from previous landlords with decent houses (their own personal places) to be more reliable. I have sold houses and held the mortgage for folks with damaged credit.
I offer them a 5 year balloon, with the possibility of extensions (depends on what rates are doing), Owners seem to take better care than any renter, and you can always foreclose and take the property back. |
RE: Lease with Option to Purchase Contract
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| "I offer them a 5 year balloon, with the possibility of extensions (depends on what rates are doing)" This scares me. I was going to do a 2 year option because my note is due to be renewed in 2 years. I'm afraid rates will have increased by then. And with the First time homebuyers credit for those who haven't owned in the last 3 years...now is the time to buy. |
RE: Lease with Option to Purchase Contract
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| You should probably call your mortgage company and find out whether they'll accept the contract as well- most won't. |
RE: Lease with Option to Purchase Contract
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1. Most lenders that I have dealt with will not accept past rent as a DP on a purchase. Some will.
2. Is the contract a lease option, or a lease purchase? Any Earnest Money Deposit the Buyer puts down on a lease purchase is legally supposed to be held in an escrow account (no comingling of funds)and and is credited back to Buyer if they close. The Deposit check should be made out to an attorney and the attorney should hold in escrow until close.
On a lease option, the deposit is an option fee, as opposed to an Earnest Money Deposit, and the seller can cash the option fee as soon as he receives it.
Of course, these are items that are true for NC. Some states probably differ.
3. I would treat them as renters until the closing. That is what they are after all... renters. I would not allow them to do repairs, improvements, changes, painting, w/o your prior written approval. You do not want to have to take back a house that renters had free control over for a year.
4. Make sure you spell out in the contract the details of the agreed upon purchase price... What happens if the home will not appraise for the value in one year? What if they can purchase it sooner? Are they able to do so or no?
5. You say you will do this contract w/o a deposit. No way. They need to pay you a fee for the service and opportunity that you are giving them. Also, you are keeping yourself from selling the home to qualified buyers NOW, in the hopes that they will purchase in the FUTURE. If these people never go to close after the year term, you will have subsidized their lease by 25%, collected no deposit of any kind, and will probably be stuck with the property in worse shape than it was a year earlier. These risks are real, and you need to be compensated for them. You do not want to be a year down the road with no deposit money AND no buyers. If they do not have any money at all to put down now, how are they going to save up for at least a 3.5% down payment in 12 months? Especially if most banks will not honor the rental overages?
6. Break the deal into two contracts... a standard rental agreement for the first year, and also sign a Purchase Agreement, with a closing date one year out.
7. Treat the renters as renters, and the buyers as buyers. For the first year, they are renters that paid an upfront option fee, or Earnest Money Deposit, in exchange for the option to buy later. They become buyers after the rental agreement is over and they sucessfully get approved for the mortgage. Lease purchses are great, but both sides need to be aware of the details. If you are able, a better deal for all, may be for seller financing. Again, the devil is in the details. |
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