Q. What Is a
Lease-to-Own Purchase?
A lease-to-own house purchase (also
"rent-to-own purchase" or "lease purchase") is
a lease combined with an option to purchase the
property within a specified period, usually 3
years or less, at an agreed-upon price. The
borrower usually pays an option fee, 1% to 5%
of the price, which is credited to the purchase
price. The borrower pays rent, and an
additional rent premium that is also credited
to the purchase price. If the purchase option
is not exercised, the buyer loses both the
option fee and the rent premium.
As with any kind of financial contract,
lease-purchase deals can be structured in such
a way that all the benefits flow to one of the
parties and none to the other. Buyers
especially need to be careful. But
lease-purchase plans have a solid economic
rationale, which means that they can be
structured so that both parties benefit.
Q. What are the
Contract Features of a
Lease-Purchase
A lease-purchase has five major
components. The sale price of the house and the
rent are market-determined, but subject to
negotiation just as in a straight purchase or
rental transaction. Buyers often know less
about the market than sellers, which places
buyers at a disadvantage unless they do some
homework, which is advisable.
Buyers generally prefer a long option
period of greater than two years because it
provides more time for them to build equity and
repair their credit. A long period
can backfire on them, however, if they are
never able to exercise the option, since they
lose the rent premium they have been paying all
the while, in addition to the option fee.
Sellers generally prefer a short option period,
but if it is too short, the house will not
get sold.
The option fee and rent premium are
viewed differently by buyers and sellers. To
the buyer, they are part of the equity in the
house they will soon own. Fully anticipating
that they will exercise the option, the only
cost is the interest they would otherwise have
earned. To sellers, however, these payments are
the best guarantee that their houses will sell;
if they don’t sell, the payments are retained
as income. That the benefit to the seller
generally exceeds the cost to the buyer makes
the lease-to-own deal a possible
win-win.
Q. Using a
Lease-Purchase to Buy
The lease-purchase offers homeownership
opportunities to consumers with little cash
and/or poor credit, who are prepared to bet on
themselves. The bet is that before the option
period expires, they will qualify for the
mortgage they need to exercise the purchase
option. During the option period, they have the
opportunity to rebuild their credit and
accumulate equity while living in the
house.
The development of the sub-prime market, in
which consumers with poor credit or no cash can
obtain loans, does not seem to have lessened
interest in lease-purchase. It is very likely
that those who succeed in exercising their
option under a lease-purchase do better than if
they had financed a conventional purchase in
the sub-prime market. The savings in finance
costs will more than offset a higher price on
the house. But those who can’t exercise their
option will lose their bets.
Consumers who need to rebuild their credit
rating during the option period should
understand that paying their rent on time won’t
do it. Rent payment information is not used in
compiling credit scores. While Fair Isaac, the
company that developed credit scoring, has
recently unveiled an “expansion” score based on
“non-traditional credit data,” it does not yet
include rent payment information from
individual home owners. Lease-purchase buyers
who need a higher credit score must focus on
their credit cards and loans.
Even though it is costly, the right
not to exercise the option is of value to
buyers. If there is something seriously wrong
with the house, neighborhood, or neighbors, the
money left behind on a lease-purchase is much
smaller than the cost of an outright purchase
followed by a sale.
Q. What
are the Concerns
for Buyers
On October 2, 2005, Bob Mahlburg, an
investigative reporter for the Sarasota
Herald-Tribune, published an article on a
substantial lease-to-own program in Florida
that had generated numerous complaints. Over a
5-year period hundreds of deals were executed
under this program but only a handful of
purchases. In fact, there were more evictions
than purchases.
The contract used in this program made
it all too easy for the seller to avoid having
to sell when it was more profitable to evict
the tenant and do another deal with another
hopeful buyer. The moral: read the contract
very carefully to make sure you are confident
you can live up to all the terms, such as
paying your rent on time, every
time.
Q. Using a Lease-Purchase to
Sell
Most home sellers want a cash sale, but for
those prepared to hang on to the property a
while longer, the benefits can be
favorable.
First of all, the deal may fall through, but
in that case the seller gets to pocket the
option fee and rent premium. The seller also
enjoys the tax deduction on his mortgage
interest payments during the option period.
-
Top sales price for your
property (no
haggling)
-
Stops the
money hemorrhage of mortgage
payments.
-
All
maintenance is delegated to us the tenant
buyer. This eliminates 2 AM phone calls.
That means someone is living on-site to
watch your property guard against
vandalism, fire danger, etc. That's like
having a security guard living in your
house who pays you - rather than you having
to pay
them!
-
You remain on
the deed - it's still your property until
the option is
exercised.
-
You continue
to enjoy all the tax advantages (check with
your tax advisor on
this).
-
It puts a new
occupant (tenant buyer) into the property
in days or weeks, rather than having to
wait 45, 60, or 90 days, which is typical
with conventional
financing.
-
It saves you
a lot of money by not having to advertise
the
property.
-
There are no
fees to pay (especially the six to seven
percent realtor
commissions).
-
It helps you
to qualify for new financing on your next
home.
-
We don’t care
what kind of mortgage you have (assumable,
non-assumable
etc.)
-
Your insurance could be canceled if you
home sits vacant for more than 30
days.
|
