Buyers – an approach you may find valuable

April 7, 2008 at 4:39 pm Leave a comment

The approach is called a least with an option to purchase agreement.  This can be used to the buyer’s advantage if the purchase price is low enough and/or flexible and based on some objective index and a major part of the monthly payment is applied to the purchase price when the purchase option is exercised. . 

The lessor is the party who owns the property and is leasing the property and selling the property under a lease with an option to buy.  The lessee is the person leasing and potentially buying the property.   


The lease with an option to buy has in the past mostly benefited the seller.  Sellers have set a purchase price higher than market value and sold the option to buy as a benefit to the lessee and prospective buyer.  Part of the lease payment is applied to the purchase if the lessee exercises the purchase option. 


The current market has now shifted the advantage to potential buyers who may want to lease the home first and then buy.  If the seller wants to resolve the problem of having their home on the market they may consider a lease/purchase agreement.


Your agent must pre-qualify the seller before you make a lease/purchase offer.  This must be done carefully because you are looking for both a home you would like to buy and a good deal.  The home has been on the market for a long time because it is overpriced.  The seller needs to be willing to take a lower price and allow the buyer to lease the property.  With 10 to 15 homes available for sale for each qualified buyer the lease/purchase option can becomes a rescue net for some sellers.   


This approach can work well for people with an adequate income and no money for a down payment.  If the buyer can pay a higher than normal rent they may be able to negotiate a great contract to lease with an option to buy.  The devil is in the details on this approach.  The potential buyer needs to make sure they are not over paying either for the rent or the purchase of the property. 


Another key is finding a seller who is willing to look at this option.  The agent for the buyer should look for homes that have been on the market for a long time, probably over 90 days and where the seller has already reduced the list price at least once.  If the home is vacant and the seller is paying a mortgage payment this is to the benefit of the buyer also.  At this point the seller may consider a lease with an option to buy agreement to cover their mortgage costs.  It is also in the interest of the listing agent to at least present this kind of offer.  The agents will get a small commission on the lease, but they will also get a commission if the purchase option is exercised and the sale closes.


The actual structure of the agreement should provide a large part of the monthly payment go toward the purchase price.  For example if the home would normally rent for $2,000 per month and the buyer can afford to pay a slightly higher amount, say $2,500 per month,  this benefits the seller if the option to purchase isn’t exercised.  The seller/lessor will keep the higher amount.       


For this consideration the lessee/buyer should ask that half or more of the monthly payment amount go toward the purchase price.  I wouldn’t be afraid to ask that all the monthly lease payment go toward the purchase if the option is exercised.  In this case that would be $30,000.   

Buyers who want to explore this option should find a patient and knowledgeable agent willing to do the up-front work to find the right home and seller and pre-qualify the seller.  The team should also include a real estate attorney.          







Entry filed under: Buyers Tips. Tags: .

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