Lease to own arrangements
Today, Sam Schneiderman, broker owner of Greater Boston Home Team writes about lease to own arrangements. It's a way for tenants to become owners and a way for accidental landlords to sell.
What is leasing to own?
Under a lease to own agreement, a potential buyer leases a property from the owner using an agreement that allows the buyer/tenant to purchase the property at the end of the lease period, typically at a pre-determined price.
Usually a portion of the rent goes toward the down payment. If the buyer/tenant does not buy at the end of the lease period, the amount set aside for the deposit is often forfeited. (Note that lenders want to see proof of a separate account for the tenant's portion of the rent being used toward the down payment.)
Who benefits?
This arrangement can benefit sellers who are having trouble selling their property and do not want to leave it vacant.
Buyer's who have had "credit events" or other issues that prevent them from qualifying for a mortgage for a pre-determined amount of time are ideal candidates for a lease to own arrangement. (Prospective buyer/tenants are likely to have experienced recent divorces, death of a spouse, extended unemployment prior to current employment, job transfers, etc. Many have good income and credit but need more time to qualify for a mortgage based on their new circumstances or they need to accumulate a larger down-payment.)
Pros
- Seller/owners can have buyer/tenants in their property who will contribute toward the cost of carrying the property and have extra incentive to take good care of the property.
- Seller/owners are often able to collect a higher rent.
- Buyer/tenants can lock in today's price and have the forced discipline of putting money toward their down payment every month.
- Buyer/tenants may be able to get some of their rent back if they do not buy the property at the end of the lease. (That would depend on what is negotiated with the seller/owner.
Cons
- Seller/owners could find that property values have gone up by the end of the lease. Unless there is a price escalation clause, the seller/owner would be obligated to sell at the previously agreed price.
- Buyer/tenants could find that property values have gone down by the end of the lease and/or the property might not appraise for the agreed upon price. Then the buyer/tenants could be obligated to buy at the previously agreed price, unless there is a provision allowing the buyers to get out of the deal.
Perspective:
Although leasing to own is not for everyone, in today's real estate market there are buyers and sellers that might be able to solve their mutual challenges by using properly structured lease to own agreements.
Before entering into a lease to own arrangement:
- Both parties should consult with a real estate attorney to discuss the pros and cons of such an arrangement.
- Buyer/tenants should get specific requirements from the lender that they intend to use to finance their purchase and make sure that the seller/owner follows those requirements exactly.
Have you had any experience with lease to own arrangements?
