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Lease Purchases

I originally put up this web page because I had seen so many buyers and sellers wander into treacherous waters and get swept away. 

Since I've put up this page, I've gotten a lot of requests for help with lease-purchases.  I'm afraid that I only sell residential real estate in Gwinnett , North Fulton, and South Forsyth Counties, and don't handle lease purchases or rentals.

It appears that the easiest way for visitors to search lease purchases or rentals is through www.Realtor.com.   Go to the main page.  Instead of filling out the home search form at the top of the page, click on the link  "More Search Options".  There, you can enter your criteria including (at the bottom of the page under Financial Options) "Lease Option".  You'll also find Lease Purchases advertised in the AJC Classifieds.

There is a difference between a true  "lease with an option to buy" and a "lease purchase." A "lease option" is just a rental with an agreement with the owner to give first option to you to purchase the home.

A "lease purchase"  is an agreement to purchase.  If you are a prospective buyer and considering a lease purchase, my best advice is to reconsider.   If you are determined to move forward in this direction,  proceed with caution. Here are some tips that will help you to make the best decision possible.

1.  The Documents

A true Lease Purchase involves two contract agreements:  A Purchase Agreement and a Lease Agreement.

The Purchase Agreement is exactly like any other, in that it specifies
the purchase price, the loan amount and terms, the closing date, the amount of your deposit and how it will be applied toward your down payment at closing, the real estate commission, if any, and any other special stipulations, such as repair items, window treatments and appliances, etc.  Remember, if these things are not negotiated at the time of contract, they will not be open for negotiation at the time the sale is consummated.

The Lease Agreement will specify the term of the lease, amount of monthly rent, parties responsible for insurance and utilities, etc.  It also should specify what portion of the monthly rent payment will be applied toward your down payment at closing.

2.  Down payment

Theoretically, your deposit to the seller will be applied as earnest money toward your down payment at closing.  Keep in mind that this is not a security deposit and is not refundable should you be unable or unwilling to close.

Although your agreement with the seller may specify a certain portion of your monthly rent to be applied toward the down payment at closing,  the lender ultimately will determine what percentage is allowable.  The only portion that can be applied toward your down payment is the overage between the monthly rent and the going rental rate for that area.  For instance if your rent is $1,000 per month, and area rentals for comparable homes average $1,100 per month, you will not be allowed to apply any of your monthly rent toward your down payment.  If your rent is $1,400 per month, you would be allowed to apply $300 toward your down payment, if your agreement with the seller is consistent with that number.

3.  Appraised Value

Many lease purchase agreements are executed without the involvement of real estate professionals.  Although you may be in agreement with the purchase amount, many sellers pad the sales price of lease purchase homes.  If the home does not appraise for that amount at the time of closing, you will be unable to get the loan you seek.   Needless to say, this is not something you want to find out just prior to closing.  My advice:  Pay for an appraisal up front to make sure the home is worth what you're paying.

4.  Condition

Unfortunately, lease purchases are often handled as rentals, and the buyers do not have the homes inspected prior to move in.  My advice is to have the home inspected by a certified home inspector, and make the Purchase Agreement contingent upon the result of the inspection.  Do not move in until this is done!

5.  Prequalification for the Loan

This probably should be item #1.   Talk to a qualified loan officer and get pre-qualified for a particular loan amount and program  (see my section on Loan Programs for documents needed for loan application).  Your Purchase Agreement will include a closing date.  What will change in your circumstances between now and that date to enable you to close on your home?  If  you will be unable to close in that time, you will be much better off renting and working toward a purchase at a later date.

Finally, ask yourself why the Seller is willing to do a lease purchase.  Is it because he/she has been unable to sell the home?   If so, why?  It may be because of the economy, or it may be for other reasons related to the home itself.   Is it an investor who has purchased the home?  If so, that investor may not expect you to close...he'll view you as a renter and looks forward to keeping your deposit when you fail to close.

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The information contained herein is believed to be accurate and timely but no warranty as such is expressed or implied.  
  © 1999-2004 Pat Sabin