Since we now live in a buyers market (for now, anyway!), sellers are grappling with how to make their mortgage payments on an unsold home if they’ve already moved. One option we talked about yesterday was renting through a property management company. Another option is to allow the sale of the real estate through a lease purchase agreement.
How does this work? A buyer agrees to purchase the home through an official legal sales and purchase agreement. The closing date is pushed out six months to a year, depending upon why the buyer can’t close right away (maybe they have to pay off a credit card or be on the job for two more months before a lender will approve the loan). A lease agreement is also completed both to protect the seller and the buyer, including whether pets are allowed, and if the buyer can Paint or make other changes to the property before the purchase is finalized.
A very important way to protect the seller in this process is to make sure a substantial non-refundable deposit is made by the buyer. Most people recommend the deposit be 10 percent of the purchase price, but honestly I think that’s a bit extreme. I believe a deposit between $5000 and $7500 could be adequate if it’s nonrefundable. The money CAN be applied toward closing costs or the purchase price in the end.
No buyer will want to walk away from that kind of money by getting cold feet. In addition, the deposit will protect the seller should the buyer walk and subsequently damage the house. That amount could clean and/or replace carpet, cover the cost of painting, and replacing broken appliances.
The deposit money should be placed in an escrow account at the title company, especially if it’s to be applied toward closing costs.
In addition, if a seller is leasing they should be careful in contract stipulations that state what they have to repair or replace should the stove stop working, or other problems (flooding, fire, etc.). Be sure that the homeowners insurance is maintained and up-to-date.
Another caveat is if the closing is a year out, perhaps the value of the home changes. If it goes up, the buyer gains instant equity because the seller will have to honor the purchase contract. If the value goes down, though, and the real estate won’t appraise, what happens? Will the seller be prepared to reduce the purchase price?
I have been involved in only three lease-purchase properties. Two closed, one did not. The one that did not was very unpleasant for everyone involved.
What experiences have you had with lease purchase contracts?
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