Lease to own your next home? It’s confusing
Dec 2010 08

I’ve never had a client ask for a “lease to own” deal. And, I’m glad about that. They seem confusing and fraught will complexity and risk.

Anyway, here’s how I see it might work, with a little help from the Wall Street Journal.

Suppose you found a home you liked but you weren’t in the position to make an offer – maybe you don’t have enough of a down payment or maybe you’re rebuilding your credit or something.

And, suppose you’re an owner of a home that just won’t sell, no matter what you do. Well, suppose you’d do anything but lower the price, maybe because you owe more than you can sell it for or you’re too stubborn to lower the price. Maybe you’ve had it on the market for months with no activity. Your agent says it’s the price but you say it’s the market.

In a situation such as this, perhaps it would make sense to work out a rent-to-own deal. The buyer and seller first come up with a price on the property – perhaps it’s less than what the owner thinks it’s worth but more than what the buyer thinks it’s worth. The idea is, the buyer gets a home for less because he/she is willing to commit to buying it today, during the recession, while the seller now has a buyer who is willing to pay at least close to what the seller thinks the property is worth. The downside to the seller is that he/she isn’t getting the money from the sale right away, so may not be able to buy another property. The seller becomes a landlord.

The buyer-renter would work out a price to rent the apartment from the owner for a year or two. Most-likely, this would be market rent, although I can see it being a bit above market if the buyer and seller agree that the excess would go toward the purchase price of the property. The seller likes this because he/she gets a steady stream of income, which is better than nothing and perhaps enough to cover the owner’s outstanding mortgage.

The buyer would also be required to put up a deposit toward the purchase price of the property – say 0.5 – 2.0 percent. This would be non-refundable. It wouldn’t be held in escrow, I don’t think, it would be the seller’s to keep, no matter what happens. It’s the risk the buyer would have to take. The seller would like this because he/she gets some money right away.

This might make sense to you but I can’t seeing it as being a popular situation. When owners want to sell their properties, they want to sell, not be stuck in a contract for years. Buyers usually want to buy, they don’t want a landlord looking over their shoulders.

Let’s use a real life scenario. Suppose you love Manny Ramirez’s home in the Ritz Carlton Towers. It’s listed for $6,900,000 (originally listed for $8.5 million). You like it, a lot, but you don’t want to spend more than $6.5 million. The property’s been sitting vacant for two years now, with no change to the price. He’s got a mortgage on the property so each month it’s empty he’s losing money. You come along and offer $25,000 per month in rent (that’s what it’s listed for in MLSPIN). He says, sure, I’ll take your $25,000 per month (try to talk him down to $22,000) and agrees to sell it to you for $6.5 million, as long as you pay $65,000 up-front as a deposit toward the purchase price.

What do you get? A long-term lease at the market rate for a rental of this quality at $22,000 as well as a sweet price on a trophy property. The $65,000 you pay up front will go toward the purchase, but even if you don’t buy, you’re basically paying $65,000 today versus an additional $2,708 each month for the next two years, or, $25,000.

If you decide not to buy, you walk away in two years with no further obligations. He has your $22,000 plus your monthly rent payments and he can relist it for sale at whatever price he wants or what the market will accept.

What does he get? Cash flow.

The risks are obvious. To him, he has to worry that he sold too low. Who knows what the market will be like, two years from now. To you, you’ll worry that you’ll find a “better” property during the next two years, or that you’ve signed a contract to lease for the next two years. Even if you don’t end up buying, the lease is a contract and you’ll be required to pay.

So, again, this works only in rare cases.

If you think it might work in your case, let me know. Especially if you want to buy Manny Ramirez’s place.

Photo above courtesy of MLSPIN

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