The lease purchase has become something we are dealing with more and more. Causes for this are numerous. But in many cases a buyer has come out of a short sale, or even a foreclosure, and needs some time to build back up their credit score. They find a home they want, like , and can afford so they offer a lease purchase contract.
The seller on the other hand may be in a sluggish market. The seller may have taken a move to preserve a job that they may not be able to get where they are. They now have a house payment, and a rent payment in a new location. So a lease purchase can eliminate a cash flow issue and now becomes an option the seller might not have normally considered.
A Realtor is just as valuable in this type of transaction for a number of reasons. But I am going to list a really common mistake both people acting in good faith can make.
Seller Jones has entered into a lease purchase agreement with Buyer Smith. Buyer Smith has come to know and trsut Seller Jones during the face to face negotiation as neither has an agent. Buyer Smith agrees to give Seller Jones a $5,000 deposit on the house as down payment and leases for 15 months. Everything is fine and Buyer Smith loves the house. Seller Jones has the $5,000 in his bank ready to go. Buyer Smith is going to use an FHA option as 100 percent financing options are not available in his area and he is not a veteran. The house price agreed on is 250,000. Buyer Smith needs $8750, 3.5 % plus closing costs. He goes to Seller Jones for the 5k.
Here is where the problems start. FHA considers that 5k a gift and since Jones and Smith are not related will not allow it. Further more doing conventional doesn't work either as the same problem about a 5K gift arises. Now Jones can either come down on the price, for FHA. or use the 5 k in closing costs only in a conventional setting. Either way both acted in good faith and Smith is stuck.He does not have enough cash to close and the deal falls through.
Is there a correct way to do this? Yes. The money needs to be in an Escrow account clearly earmarked for down payment. If Smith or Jones had used a Realtor this problem would have been avoided and the deal would have gone through.
This is just one example of why even with Lease Purchases you should use a Realtor
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Charlie Ragonesi All Mountain Realty Big Canoe and Mountain Blog
On line at www.allmountainrealty.com Call at 706 579 1098
This is very informative. Thank you.
The other big issue that I see is that FHA will not allow a portion of the rent payments to be applied to the purchase price unles such payments represent the excess of what is paid to the landlord and fair market rent. Basically, the lessee/buyer is pre-paying the agreed upon purchase price.
This leads me to the other issue. Unless the purchase agreement is signed at the same time as the lease, it is sometimes difficult to protect your commission on the ultimate sale. Many agents will rebate their leasing fee once the purchase is finalized, say 1 year down the road. Unless the lessee/buyer and the landlord/seller agree upon a purchase price up-front, and formalize it in a real estate purchase contract with a delayed closing, I treat the deal as two separate transactions. One is a one year lease. The other is a purchase and sale. The leasing fee is paid by the lessee and the sales commission is paid by the seller, with no concession by the realtor for money previously paid.
Charlie...
This is very interesting, and people should be wary when entering into complex transactions without the help of experts!