Monday, December 20, 2010

Lease-purchase agreement can help buyer and seller

[This article first appeared in the Chattanooga Time Free Press]

Q: What type of home sale is a "lease purchase?"

A: The term "lease purchase" is sometimes used loosely when referring to the purchase of a home. A true lease purchase would include a period of time that a buyer would lease the property prior to actually purchasing the home. In a lease-purchase agreement, the buyer is actually proposing an "option" to purchase. The buyer and seller would agree to a lease agreement with terms for the period the buyer is actually renting the house. And there would be a purchase agreement to define the terms of the sale of the house after the lease period. A lease-purchase agreement will include a lease agreement and a purchase agreement that would be contingent upon the both of them happening. It is not a lease- purchase if a buyer prospect simply wants to lease or rent the home for a period of time without the intention of a purchase. This would merely be considered as a lease agreement. As a home seller, a lease-purchase agreement could be a viable option to selling a home. If the seller is able to purchase another home without the sale of their existing home or has already moved out of the home for sale, it could be a great way to ensure a sale at future date. It would lock in the terms of a purchase and create an income stream to the seller during the lease period. In some cases, it helps to place an occupant in an otherwise vacant house to care for the home and reduce insurance rates which are typically much higher than an occupied property.

There are many reason why a buyer may consider or need to propose a lease purchase agreement. Sometimes there are circumstances that need time to pass to make a mortgage loan be approved for the buyer. This could include more time on the job, more down payment money saved, debt to be paid off, a credit blemish to be remedied and many other valid reasons. As a home seller, you want to make sure that the buyer's reason is something that is achievable and not a lofty expectation that it will happen. Circumstances other than a delayed mortgage approval could be a reason for a buyer to propose a lease-purchase agreement and would need to be considered on a case by case basis by the home seller.

In most least-purchase agreements, there is a substantial security deposit paid by the buyer. The amount is usually high enough to make sure the buyer actually follows through with the purchase and to cover the seller's damages if they did not. Typically, this security deposit is non-refundable if the buyer did not complete the sale according to the terms of the purchase agreement. Otherwise, the deposit would apply to the purchase price and be credited back to the buyer at the closing.

During the term of the lease of the lease-purchase agreement, the parties become landlord and tenant. The seller is the landlord and the buyer is the tenant. The lease agreement will define the terms including monthly rental amount, length of lease term, fee for late payments, permission for any pets, insurance coverage, repairs and other terms typical of a lease. Both parties need to keep the landlord/tenant relationship until there is actually a purchase. For many home sellers, this could be their first and only experience as landlord. The buyer needs to realize that they don't actually own the home during the lease period. Until the buyer pays for the property in full, any improvements to the property such as new flooring or kitchen cabinets will be the property of the seller.

In today's market, lease purchase agreements are being offered by sellers and presented by buyers in increasing numbers. They offer an alternative to a traditional home sale closing in 30 to 60 days. A buyer can occupy the home prior to their ability to complete the sale. A seller can achieve a sale with a delayed closing. In all circumstances, both parties need to understand the terms of the agreement and the reason for considering the lease purchase alternative. The lease purchase agreement could very well create a "win-win" which is the desirable outcome in any home sale.

Get answers to questions you might have about real estate from Randy Durham, who is president of the Chattanooga Association of Realtors and a broker with Keller Williams Realty. His column appears on Sundays. Send your questions to Business Editor John Vass Jr. at jvass@timesfreepress.com