A Lease to Own Program is a solution that is brought out in markets where sellers want to sell to customers that cannot or will not purchase the property in a traditional way.  These customers typically lack the confidence to enter into a binding agreement to acquire the property or they simply cannot qualify for a mortgage because they either have bad credit or do not have enough cash for the required down payment.

First; “What is a Lease to Own Program?”

While there may be a number of variations, Lease to Own Programs are based on the basic premise that an owner will enter into an agreement with a purchaser that will provide for a period of time during which the purchaser shall occupy the property as a tenant and complete the sale at a future date.

The terms and conditions of the period from when the prospective purchaser moves in, until the day the deed is transferred will be covered under a lease.  The terms and conditions of the sale will be covered under a contract for sale.

The Key Elements of a Lease to Own Program:

1               Establish the future purchase price for the property or how it will be calculated

2               Establish the term and conditions of occupancy under the Lease to Own Agreement

3               Establish the date when the transaction would be completed

4               Establish how much of the rent was apportioned towards a future deposit if any

5               Establish how the tenant could assign their rights to the property

6               Establish the amount of the payment for an option if this is part of the program.

Why Lease to Own Programs going to grow in popularity

Lease to Own Programs are not new, they are a proven solution that has worked before.  Lease to Own Programs are brought out and dusted off when there simply are not enough ready, willing and able purchasers to actually buy the homes at the price points and during the time periods that are required by the seller.   They disappear as markets strengthen and normalize.

The newspapers are filled with stories about the soft real estate market.  We believe that alternative programs like a Lease to Own Program that can address this issue head on, will gain traction.

Picking a “right solution” for any task requires a fundament understanding of the factors that are influencing the local conditions of the real estate market in the area where you expect to find a purchaser.  Selecting a Lease to Own Program is not different.  Knowing that the market could have been influenced by many things; a change in the availability of credit, overbuilding, a general deterioration of the economy as a whole, or something as simple as the loss of jobs or even the cost of materials driving costs up are contributing factors.  Lease to Own Programs address challenges where the prospective purchaser’s don’t have access to credit or down payments.

Lease to Own Programs are designed to generate a “future sale”.

Why the time is right for Lease to Own Programs in America today?

The real estate market in America is going through a tough time right now.  Real estate values have dropped and the capital markets are very constrained.  These challenging times will encourage both sellers and buyers to reach out and embrace new ways of doing business.

Lease to Buy Programs are a very valuable tool under these market conditions.  This type of program will allow you to work with anyone that wants to occupy a home that can make a monthly payment.

What are the Challenges?

Lease to Own Programs are typically pulled out to generate sales when it is difficult to get the required price or where there is a need to move more inventory than the market would normally absorb.

A prospective purchaser that is attracted by a Lease to Own Program often is either not willing to or not able to make a traditional purchase.

If the seller tries to maintain prices that are higher than the market price, then there is a risk that a property will not appraise, complicating financing on closing.

Obviously when you mix a seller that is targeting an audience that is not willing to actually purchase the property under normal terms and conditions with a seller seeking to sell an over-priced property, completing contracts can become a challenge.

Why would anyone want to get involved with a Lease to Own Program?

A Lease to Own Program is a viable and valuable solution when it is being used to solve a problem that would enable a traditional sale to take place.  For instance, a Lease to Own Program can buy time until a prospective purchaser can fix their credit or gather up a down-payment to qualify for a mortgage.

There are many variables that can be explored under a Lease to Own Program.

Arrangements for how the payment of any deposit that could be required in the contract for deed could be made in the documentation.

If there isn’t a firm requirement to actually complete the transaction, then there could be an option fee.

It should be noted that if the Lease to Own Agreement provides for a deposit to purchase the property, or a payment for an option and a security deposit or any other payments, the owner might want to consider collecting separate checks that match the corresponding amounts in the agreements.

Things to consider

The lease and the contract for deed are each documents that can be constructed to either benefit the tenant or the landlord and these documents will need to be constructed in such a way as to merge their intentions, terms and conditions into a single agreement.

The rent could be higher than market or lower than market, the contract for sale could be binding or be an option.  The price could be fixed or adjusted.  There are not any hard or fast rules other than the owner and the prospective purchaser must comply with the laws that govern being either being a landlord or Tenant as well as being either a buyer or seller.

The paperwork is very important

The documentation needs to address the requirements of the local laws and regulations with regard to leasing, selling and granting an option.

The owner and the prospective purchaser should each consult with their respective lawyers and know each other’s obligations and rights.  There is a period where their relationship will be governed by a lease and the landlord and tenant need to understand what that lease actually says.  For instance, there might be a requirement for the lease to actually terminate on the termination date and not have an opportunity to renew enabling the vendor to regain vacant possession and offer the home for sale.

There also has to be default provisions and a clear understanding of what happens to any deposit money that was made under an agreement of purchase and sale as well as how any security deposits would be held under a lease.  If there is an option to buy and it is not a requirement to purchase then a description of how the option money will paid and what it is buying should be clearly set out.

Since the owner is also entering an agreement sell the property, the requirements of a contract for deed must be met including information such as a sellers disclosure form.

Obviously the documentation for an agreement that is going to be this complicated should be prepared by a lawyer that fully understands all of the issues at hand.

Other stuff

There are lots of things to think about.  For instance, the owner is going to be a landlord for a while so there should be insurance in place that a typical landlord would carry during the period that the prospective purchaser is occupying the property as a tenant and there should be a requirement for the tenant to carry insurance as well.

Clearly spell out who is responsible for maintaining the property, paying the utility bills and making the necessary repairs during the period that the prospective purchaser is occupying the property.  For instance if a prospective purchaser is assuming that they are actually going to be the owner they may start making ownership decisions such as cutting down trees or replacing a deck.  They should clearly understand exactly what their rights and obligations are during the lease period.

The Deposit:

Lease to Own Programs can also include a provision for a staged deposit.  The deposit or a portion of it could be refundable and simply be used to reduce the carrying costs and the value of the deposit could be reflected in a lower base rent instead of interest on the deposit.  The deposit can be non-refundable and dealt with as a normal real estate deposit, be placed in escrow and either get interest or not.

The Option Fee:

An Option Fee is the price to have the right to close in the future.  The price of the Option Fee could be a cash fee or the option could convey the right to purchase a home at a higher price than it is currently being offered for sale at or some combination of the two.

The Option Fee could be a single payment or it could also be broken into staggered payments increasing the amount of the commitment.

Why we will probably see more Lease to Own Programs.

If the goal is to eventually sell the property, then the prospective purchaser must be able to bear the costs that at least match the actual cost of ownership.

That said, it is quite possible to improve the bottom line by selling property under a Lease to Own Program where the owner of the property can experience a real benefit if the prospective purchaser does not go forward with the transaction.  The monthly carrying costs under the Lease to Own Program could be significantly higher than an owner would have otherwise received as rent.  The way that deposit money or option fees are either returned or forfeited can also influence the bottom line.

Written by:

Harold Green

www.CentralShowPlace.com