Ever heard of a lease-to-purchase-house? Most of us would say we have. But many folks would say that a residential lease purchase agreement is simply a rent-to-own contract. While this is true, it only describes a brief overview of what a lease purchase contract is all about. Although the real estate market remains strong here in Texas, lease purchase agreements are still a highly viable way to buy into properties, as well as sell them. But lease purchases are not limited to Texas only, they can of course be done in other states. Let’s take a look at a typical scenario revolving around the lease purchase contract:
Other Articles in this series:
- Passive Income in Real Estate
- Property Rehabbing
- Renting Out Your House
- Seller Financing Agreement
- Residential Lease Option
- Business Plan for Property Management
Mark contracts with Larry to buy Larry’s house on a lease purchase. The terms of the lease purchase guarantee a sales price of $100,000, and a rental rate of $1,100 per month. Larry also guarantees that $250 per month will be credited toward the purchase of the home at a later date. At the end of the lease period, Mark has the option to buy the house. If he doesn’t, Larry is able to keep the $250 per month that would have been contributed to the down payment of the house.
The Buyer’s Perspective
This is a good situation for a buyer that doesn’t have the cash to buy a home. Bit by bit, the buyer can pay towards the down payment of the house, and then close on it at a later date. Also, this gives a potential buyer with less than perfect credit a chance to develop a stream of solid payments, thus being more attractive to a bank or mortgage company when it comes time to close on the property.
The Seller’s Perspective
From the viewpoint of the seller, this strategy, in my opinion, is not the best course of action. It does have its benefits, such as being able to charge a little more rent than you might get otherwise, but other than that, it is much different than renting, while also having to guarantee a sales price in the future. Another potential benefit is, if the buyer doesn’t have enough money to put down up front (like in the lease option scenario), they are likely not to be able to continue making timely payments, and you may be able to keep the additional rent, and then resell the house. But to me, if someone is to assume control of an asset that I own, I want to see some money up front. It’s just too much of a risk to me that a buyer will tear up the property, then break the agreement, and leave me in a position of having to spend a lot of money in repairs.
In short, as a seller, this strategy should be used with caution. In slow markets, or in markets where you just can’t find a buyer with any money to put down on the house, then consider this idea. The lease option is a far superior method to the rent-to-own concept. Get some money up front, let the buyer bail later, keep the option fee, and resell the house.
As a buyer though, this is a great way to control a property for no money down, while you attempt to procure a buyer / renter at a higher price…