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Is a lease/purchase a viable option?

Posted by gayled (My Page) on
Tue, Jun 28, 11 at 5:57

We are building a house and we need to close by Sept 1. Our current home had been on the market for 6 weeks. We have buyers that desperately want to buy our house, but so far, they have been unable to sell their home. We have known this couple for several years and would love to find a creative solution that would work for both of us.

I'm thinking of a lease/purchase. They purchased their home in 2005 at the peak of the market. Due to current market conditions they have lost what little equity they had. They also don't have a whole lot of cash. They are very solid professionally and are pre-qualified for a mortgage on our home with 5% down. They are unable to take a large enough price reduction on their home to allow them to have the cash to meet the 5% downpayment requirement.

If they rented their home for a year or two it would allow them to pay down the mortgage to a point where they are no longer net negative. They can comfortably support the lease payments on our home until they are able to sell their home.

Is this a viable option? Anyone have a creative solution? At this point we have no other buyers and showings have slowed considerably. We're getting very nervous.

Although not a perfect solution, we are in a position where we could close on our new house without the proceeds from the sale of our current house. It would hurt, but we could do it.

Anyone have experience with a lease/purchase. I would really appreciate your thoughts. Thanks.


Follow-Up Postings:

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RE: Is a lease/purchase a viable option?

I personally wouldn't touch that with a 10 foot pole. You have "buyers" with no money to buy your home. That isn't a buyer.

You are hoping that several years down the line, they come up with more money. What happens if their home value continues to fall? They may never get out from underwater. What happens if home prices rise? Are they going to pay more for your house then?

Unless you really want to be landlords, just reduce your house to a price that generates traffic and will get an offer.


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RE: Is a lease/purchase a viable option?

"Unless you really want to be landlords, just reduce your house to a price that generates traffic and will get an offer."

I agree.


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RE: Is a lease/purchase a viable option?

Obviously no one has actually done a lease with option to buy.

They do not run forever, but have a designated time for the option to be exercised or expire.

They also cost some money up front (the cost of purchasing the option).

I have done them a couple of times, and the renters have always taken very good care of the place, since it might end up being there.

I am not sure I would do it with 'friends' since that is often a bad thing anyway.
If anything goes wrong the friendship will be over.

Yes, you run some risk of a change ion value since the option normally sets the purchase price, but that is part of what the option fee is designed to cover.


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RE: Is a lease/purchase a viable option?

Why are the potential buyers moving? If it's not a relocation issue, why are they not just staying in their existing home until they've got equity back in it?

I know that wasn't your original question, but I'm worried about them being overextended, which wouldn't bode well for an eventual sale. Renting out your own home so you can rent someone else's seems a bit odd.


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RE: Is a lease/purchase a viable option?

I'd stay as far away from this idea as possible. You take all the risk, which is never a good strategy in my book.


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RE: Is a lease/purchase a viable option?

"You take all the risk, which is never a good strategy in my book."

Not if you structure the deal correctly.


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RE: Is a lease/purchase a viable option?

"Not if you structure the deal correctly. "

No, there is no way to structure a deal where the owner doesn't take on the risk. The owner can charge fees etc to help offset the possible costs of those risks, but ultimately, the owner is one with skin in the game.


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RE: Is a lease/purchase a viable option?

"No, there is no way to structure a deal where the owner doesn't take on the risk. The owner can charge fees etc to help offset the possible costs of those risks, but ultimately, the owner is one with skin in the game. "

You can provide all sorts of protection eliminating almost everything if you can get someone to agree.
Price increases over time, short option periods, and increased option cost.

About the only thing you cannot eliminate is the option not being exercised.

The real risk is pretty low when you set them up correctly.
They are very common in commercial work, not so much in residential.


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RE: Is a lease/purchase a viable option?

I'm the OP and I want to thank you for weighing in on the lease/purchase idea. Unfortunately, nothing has changed. We've reduced our asking price, but still no offers. Our price is so low that we're a few thousand from Zillow estimate - and you know how low Zillow is! There have been very few closed sales in my price range, in my town, this year. We have resigned ourselves to the idea of renting - there doesn't seem to be any alternative. Seems to me, if we're going to rent, it's better to rent to someone that might buy it.

brickeyee - any suggestions on how to structure it?

Really appreciate your help. Thanks.


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RE: Is a lease/purchase a viable option?

"any suggestions on how to structure it? "

Get a good local RE attorney and tell them what your concerns are and what protections you would like.

In an upward moving market I have even included increases in the price in the agreement depending on when it is exercised.

It is often easier to make the option period shorter and then renegotiate another option if it expires un-exercised.


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RE: Is a lease/purchase a viable option?

Make sure the renters understand that they are renters, and not in any way buyers of the home until they actually close. (which happens rarely)
I prepare two contracts... one is a rental lease, and the other is a Real Estate contract with a delayed closing date.(the date when the rental lease runs out). If they do not close on the deal per the contract, they lose their deposit. (This is a lease purchase, not a lease option... A buyer would typically want to do a lease option, whereas a seller would typically want to do a lease purchase) And do not forget that any deposits for the lease purchase must be deposited into an escrow account with an attorney; to be dispersed accordingly to the seller or buyer at the end of the period. Seller is not to use these funds for anything during this time period.
You should seek the advice of a good RE attorney, because most agents do not understand them well.


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RE: Is a lease/purchase a viable option?

you are gonna be sorry. they don't have 5% to put as a down payment. They are not gonna buy your place in the end, even if they rent. they will have some kind of money issues - such as a job loss, or a foreclosure on their record from not being able to pay mortgage on the home they now own, or divorce or unforeseen expenses, etc. and because you are friends, they will expect you to understand and do them favors, such as late rent or get out of the lease or who knows what.

their home will likely not have renters the whole 24 months and they will have to pay rent to you plus their mortgage. or their home has problem renters. they just don't have any reserves for anything. and things do come up, plus they have to upkeep the home they own.

they are just too short of money and the miniscule amt of principal increase over the next 2 years that they expect as equity will be offset by other expenses. their homeowners insurance will increase because their home will be a rental home. they probably can't get enough monthly rent on their current home to cover the mortgage/tax/insurance/upkeep now..as they can only expect to get market rate rent on the home. if they hire a realtor to rent their home, that costs money too.

you are dreaming big with them and so are they....too big. their problems will become your problems. no way. and guaranteed, the friendship will be over. it it probably strained now because they are waiting on your decision and you feel compelled to give them a break (already). that is just the beginning. guilt trip and eventually you will get sick of it and might have to evict because their money issues came up. because they just cannot afford both places, even if they think they can.


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RE: Is a lease/purchase a viable option?

"I prepare two contracts... one is a rental lease, and the other is a Real Estate contract with a delayed closing date.(the date when the rental lease runs out). If they do not close on the deal per the contract, they lose their deposit. (This is a lease purchase, not a lease option... A buyer would typically want to do a lease option, whereas a seller would typically want to do a lease purchase) "

And now you have locked everything in without providing any real protection for the seller.

What if property values rise significantly?
You already lock ed a price (if there are blanks on the contract it is generally not a valid contract.
No court will enforce it.

Lease-options to purchase are used pretty routinely in commercial work, why not just execute one with whatever protections bath parties can agree on.

Saving some attorney time by not having a lease-option actually drawn up correctly by using a mish-mash of other contract vehicles is asking for trouble down the road.

Lease-options even have cancellation terms in some cases.


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RE: Is a lease/purchase a viable option?

We bought our current house as a lease purchase. It is a one hundred year old house and we wanted to get all the necessay inspections and engineers out to look at it before we bought it. Our original agreed upon price was $25,000 more than the actual price we paid. We negotiated the price down because of the issues that came up in our inspections. As a buyer this was a very good deal for us.
Diane


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RE: Is a lease/purchase a viable option?

Brickeye,
give me more credit than that... You state:

"Saving some attorney time by not having a lease-option actually drawn up correctly by using a mish-mash of other contract vehicles is asking for trouble down the road."

In the state of NC the RE Commission does not have an official Lease Option nor a Lease Purchase contract. The way I do it is the way it was advised by me from two separate RE attorneys. You need a separate Rental Lease Agreement because that is what is happening during the first term. The future buyers are tenants and the future seller is a landlord. It is not a mish mash of contracts. It is the way to protect both parties, and both contracts refer to the other contract.
As far as what price is agreed upon, there are numerous ways to handle this so that everyone is in agreement. Usually the parties can agree up front on a price, with an appraisal contingency. Another way done is to have parties agree to settle on the buyer's lender appraisal which is done at the end of the term. There are other ways of handling the sales price too, besides what I just mentioned.
This works well for em and my clients.


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RE: Is a lease/purchase a viable option?

The bottom line is that ANY WAY you structure a contract for the future leaves the owner open to risks. That is why buyers are required to buy the option - to compensate the owner for taking on that risk.

From a sellers perspective, there is a lot of risk in short term pricing etc in today's market. Obviously, this varies by location, but I don't think anyone would be shocked if prices dropped or rose 5% in the next 6 months. These buyers don't have that kind of money to cover that type of risk exposure.

Beyond that - they are friends. Say they can put up $5k that will be yours if they fail to exercise their option to buy. If they can't make that date, it most likely means things haven't gone as planned and they are still in financial trouble. Are you really going to say "Too bad, the money is mine now." ? What if that $5k is the difference between them losing their current home? Will you give them another 2 months? 6 months?


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RE: Is a lease/purchase a viable option?

Thanks to everyone for offering their opinion on this. Clearly, there are risks - for both the buyer and for us as the seller. But then again, getting out of bed everyday is a risk! This is certainly not a perfect solution, but it appears that we are going to have to rent the house. I would rather rent to someone that might buy it. We would not enter into any sort of agreement without benefit of legal advice, but I appreciate the options that posters have presented; two contracts vs one. Interesting.

The exact particulars of this agreement are yet to be determined but we are going to pursue it. As I see it, we just don't have a choice. We don't want to support two mortgages and this is a way to defray our expenses.

powermuffin - thanks for a happy ending, you give me hope!
billl, ncrealestateguy, brickeyee- you really know your stuff,thanks for sharing.

I know that a lot can go wrong and relationships can deteriorate, but a contract has as much to do with the parties involved as it does with the stipulations in the agreement. This is not my first rodeo and I will use caution, but I also trust my instincts. These are good people, well respected in the community (he's an administrator at a local school) that made a lousy real estate decision in 2005, along with millions of others. I certainly want to minimize my risk, but leaving this house vacant will immediately diminish my chance of selling; renting to strangers scares me silly...not a whole lot of options. This seems like the best of the worst.

Will keep you posted.


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RE: Is a lease/purchase a viable option?

"In the state of NC the RE Commission does not have an official Lease Option nor a Lease Purchase contract."

And you are prohibited from creating one by what law?


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RE: Is a lease/purchase a viable option?

Did they already determine the rent price on their home and is it realistic? I suppose it will not cover their mortgage if they bought in 2005 with a small down payment?

If they simply set the rent to be their mortgage + insurance + taxes, they might not be able to find renters if the rent is above market rate.


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RE: Is a lease/purchase a viable option?

Brickeye wrote:
"And you are prohibited from creating one by what law?"

Actually ALL RE agents are prohibited from practicing law. Drafting a contract is practicing law, and the RE commissions across the Country prohibit it.


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RE: Is a lease/purchase a viable option?

"Actually ALL RE agents are prohibited from practicing law. Drafting a contract is practicing law, and the RE commissions across the Country prohibit it. "

No it is not.

You draft a contract every time you fill in the blanks and make changes even to a standard contract.

There is no prohibition on ANYONE creating sa contract.

You cannot advertise and hire yourself out to the general public to draft contracts, but can draft them as part of your normal business operations.


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RE: Is a lease/purchase a viable option?

Brickeye,
You are wrong again. What makes you an expert on the laws that govern how us agents can and can not run our business? After all, weren't you not the landlord that had to be educated a few months back, that you just can not go into your rental property after a lease and just throw away anything that was left behind by the tenants?


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RE: Is a lease/purchase a viable option?

"What makes you an expert on the laws that govern how us agents can and can not run our business?"

You seem to be unaware that writing a contract is not practicing law.

Contractors and trade people do it all the time.
When you sign the estimate for repairs you have just established a contract.

Did you hire an attorney to write it?

You ARE writing a contract even if you use a 'fill in the blank' standard form.
it is just a piece of paper until it is filled out and signed by the parties.

The disposal of property in a rental unit is a function of state law (and sub-municipalities if they have the power to regulate), and NC has some of the stupidest ones I have ever seen.

The landlord becomes a storage agent.
Who rammed that junk through?


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RE: Is a lease/purchase a viable option?

"You seem to be unaware that writing a contract is not practicing law."

In real estate it is. This is what our real estate commission says:
The following forms are promulgated by the Real Estate Commission and are within the purview of Rule F

Pursuant to Commission Rule F-7, real estate brokers are required to use Commission-approved forms as appropriate to a transaction or circumstance to which a relevant form is applicable. In instances when the Commission has not developed an approved form within the purview of this rule, and other forms are used, they are not governed by Rule F. Other forms used by a broker shall not be prepared by a broker, unless otherwise permitted by law.

It is not acceptable for a broker to hire legal counsel to draft an alternative form when a Commission-approved form is already available and is appropriate to use in a transaction. However, legal counsel for the buyer or seller may draft documents that would otherwise replace the Commission-approved forms. Brokers that do not use the Commission-approved forms as required may be subject to discipline of their professional license.


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RE: Is a lease/purchase a viable option?

I'm the OP and I just wanted to update everyone. We decided to take one more price reduction before we went forward with the lease/purchase arrangement. It must have been the magic number because we had 3 offers over the weekend. After some negotiation we accepted an offer from a buyer that is putting 20% down and wants to close within 45 days. This offer was not the highest, but had the best terms and buyers are extremely qualified.

Needless to say, we are thrilled. Life is good again. Now we have to get through the inspection (shouldn't be a problem, 8 yr old house that we had pre-sale inspected) and the appraisal. Based upon comps the house should appraise without a problem - but values still seem to be declining.

Thanks again to everyone. I'm so glad that we don't have to go the lease/purchase route.


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RE: Is a lease/purchase a viable option?

Great news! Good luck and a happy closing.


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RE: Is a lease/purchase a viable option?

Great!
I bet you have already forgotten about the price reduction... a good contract will do that.


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