In these challenging real estate markets, lots of people are talking about leasing a house with an option to buy – because their house hasn’t sold, or their credit is not good and they are looking for a way to have more permanence and a better investment.
What does a lease purchase agreement look like? First, it can be whatever two parties negotiate. I am going to discuss “the usual ways” it is done, but it can be negotiated however two parties can find a meeting point.
A tenant, or potential buyer may be moving to a new town. Perhaps their house isn’t sold yet in their old town, but they do want to buy in the new town. “I don’t want to have to move twice” they say, “even though I do have to rent for a while.” This buyer wants to move into a house that they can potentially buy when their house sells. But if they really don’t like the house after they move in, they may decide they don’t want to buy it.
Traditionally, for a lease with option to purchase, the buyer would put down an amount of money as a deposit – a completely negotiable number, but think thousands, not hundreds. This money would go towards the purchase of the house if the buyer buys the house, but is retained by the seller/landlord if the buyer does not buy the house. It is a nonrefundable amount of money the buyer is giving the seller to express their good faith to want to buy the house. The sale price of the house is also negotiated. It usually would represent what the buyer and seller think that the house will be worth when the buyer buys it. Both are taking a risk that they are getting the better deal in the transaction. If the purchase is to take place in one year, the purchase price would be what they think the house will be worth in one year. Part of the money that the buyer pays in rent would then go towards the purchase price of the house.
This is meant to be a way for buyers with low credit to work towards buying a house. It is really a good benefit for the seller – as very many of the buyers are not able to buy the house and the sellers keep the down payment/deposit.
What I hear buyers want now is a way to not have to move twice. They may not have bad credit, they are just trying to find a “better way”. What we need to be looking for is a landlord who might consider selling. For a buyer with good credit to put down a deposit puts them at a disadvantage. Did they inspect the house? Do they know what they are getting? Often not, because they are starting as tenants. Then, if they decide to move, they lose their deposits. Buyers now also want to have some of their rent go towards the purchase price. Well, the rents haven’t gone up as they might have in an earlier economy and landlords may not have the financial flexibility they once did.
When you are considering a rent with option to buy, analyze what it is that you are trying to accomplish. I, or another agent, can probably help you with your goals, but there needs to be good conversation to clearly identify what you, as a buyer, really need, want and can do. We are working together as an industry to make good deals for buyers and sellers – let’s see what we can do together.