|Lease purchases for creative sales
Julie Garton-Good, GRI, DREI
The house hasn't sold. Your new job starts in less than thirty days. The
alternatives are: 1. Leave the house vacant (But how will you make the
payment?); 2. Rent the house (And be an absentee landlord?---Maybe not.)
Or how about a third option? Use a lease purchase to sell your home.
Let's cover the pros and cons of selling this way and investigate how a lease
purchase may provide added home buying leverage to lure buyers.
A lease purchase is different than a lease option. A lease option is merely
a lease with an option to buy--but the lease purchase we're describing
is a true sale--only with a delayed closing often projected several months or
more in the future.
Here's how it works. The buyer agrees to purchase the property from the
seller under terms and conditions they mutually agree to. Both parties spell out
everything--(and I mean everything!) on a purchase agreement. The seller moves
out and the buyer takes occupancy with the sale to close on a predetermined date
in the future. The buyer also agrees to make monthly lease payments. Often the
seller will agree to credit a portion of that amount to the buyer for closing
costs or down payment.
Why would a seller and buyer agree to a lease purchase? From the seller's
viewpoint it may be better than renting out the property, the payment is
covered, and eventually the seller will have his equity when the sale closes.
The delayed closing of the lease purchase allows the buyer additional time
to overcome one or more valid roadblocks that prohibit the sale from closing
today. These could include a buyer who needs more time on the job to qualify for
a mortgage, a buyer still accumulating money for closing costs, or someone
waiting for the sale of his former residence to close.
The seller should be on the lookout for roadblocks that may indicate that
the buyer is being unrealistic. These could include critically damaged credit or
a buyer trying to save an unrealistic amount of money for the down payment!
As with most real estate sales, a great deal of the strength of the lease
purchase comes from the completeness of the agreement---so spell everything out!
Either in the Purchase Agreement or on a separate Lease Purchase Addendum,
cover the following:
First, Who pays what, and when? This should also cover transfer of the
utilities and how services (like water, sewer, and garbage) will be prorated.
This is important since unpaid water and sewer charges can become liens against
Second, who has insurance coverage on the house? The seller usually keeps
coverage in force, but it's not unusual for the buyer to add extra insurance to
cover personal possessions and liability.
In your agreement also address if physical changes will be allowed to the
property prior to closing. This is a very sensitive area. If the sale should
fall and materials and labor were not paid for, liens could attach to the real
estate. The safest route is for the buyer to wait until closing before making
physical changes to the property.
The question everyone asks is what happens if the buyer backs out and does
not close the sale? Since the lease purchase is a true sale (just with a delayed
closing), the remedies for default stated in the purchase agreement would apply.
This means that the seller could take legal recourse if the buyer did not
complete the sale.
One last point. It's extremely important that the buyer be pre-qualified
with a lender before entering into a lease purchase. This information is
invaluable to the seller, especially since he'll be leaving the property in the
When initiated correctly, the lease purchase can get the seller happily
moved and buy precious time for the buyer. Ask your Realtor® how a lease
purchase might assist you!