Lease Option/Lease Purchase-Allowing Time To Repair Credit

In this current real estate market where there are more sellers than buyers with varying degrees around the country, old tried and true practices are back in vogue. When properties are sitting on the market with no activity, it is important for sellers to open themselves up to options to move out from under the large monthly mortgage obligations some way and some how until selling conditions are more favorable. The property can be rented but there is zero commitment from a rental customer to do anything with buying the property. An alternative is a Lease Option To Buy or a Lease Purchase.  Typically, a Lease Option stipulates an exercise price on or before a certain date. The Lessee, in addition, to say the first months rent, last months rent and a security deposit will tender Option Money of several thousand dollars to secure the right to exercise at a specific price within a period of time. If the buyer exercises the option, then a contract is structured per the elements of the Lease Option agreement.  A closing date is set and the transaction is moved to a real estate contract with a contingency for financing. Many times a certain percentage of the lease payments are structured by agreement to apply towards reduction of the contract price. As an example, if the rent is $1,500 per month and say $300/month is designated as a “rental credit’ toward the contract price if the lease option is exercised in the 12th month; then, the rent credit would be $300 x 12 months = $3,600.00.  If the exercise price is say $150,000 and a “rental credit” of $3,600 is applied the new exercise price is $146,400.00. Lease Option payments run a little higher than prevalent market rents as an additional incentive to exercise on part of the buyer. If the Lease Option is not exercised, then all monies are considered as rent. A noted benefit to the seller, with a normal Lease Option contracts are structured where the buyer is to perform ALL maintenance and upkeep of the property.

A Lease Purchase is coupled with a Purchase Contract at the get go. Simply it couples a Lease Contract with an Option to Purchase Contract creating a Lease To Purchase Contract. The same “rent credits” and option window dates are specified in the agreement and in practice the option monies typically are greater indicating more of a commitment from the buyer to make this a more probable purchase in the end.

The whole idea, if the home is not selling through normal avenues and you have a potential buyer in front of you, albeit not ready at the moment to buy, then why not explore this avenue if you need immediate payment relief. Many buyers have short term job histories or other credit challenges and this one or two year period gives them the opportunity to fix and improve their credit history and gives them a better chance to qualify for a loan down the road. A good rent history with on time payments with no
30-day lates will go a long way towards qualifying for a new loan upon exercise. It is important to note that all payments must be by personal check or bank certified checks which can be produced to demonstrate the required on time payments history with no lates. Many lenders will not accept a Verification of Rental payment with such a close relationship with the seller. It is not considered an arm’s length transaction and therefore not acceptable. The checks are required or it’s a no go on the financing qualification upon exercise.

Dale M.