Lease-Purchase agreement question

mkrotchie · 09:19 AM

Hey guys, I was wondering how the financing part of a lease-purchase agreement works, specifically how the buyer will secure financing if they do decide to purchase the home.

I've heard two different things:

1) You would get a traditional mortgage loan, OR
2) It would be a refinance.

EDIT: One more question, do you not get paid your commission until (and IF I suppose) the home is purchased?

Saodavi · 06-08-2007, 10:50 AM

It can't be a REfinance because there was nothing financed in the first place.

Lease purchases usually have the buyer leasing the property with an option/requirement to purchase after a set period of time. During the lease, a portion of the rent payments are going towards the purchase of the house. Therefore, the lease-purchaser actually has an equity position in the property. If they stop paying rent, you cannot evict them. You must go through a foreclosure process ... unless the lease documents state otherwise.

Back on track: The buyer needs to obtain financing just like anyone else would. Speak to a lender and get approved for the loan of the appropriate amount.

The only catch in a lease-purchase is that you might need to credit them some amount of money off the purchase price since they've been renting the house. Both the original purchase price AND the tenants monthly contribution (if any) should be stated in the lease at the onset of the agreement.

That's it.

mkrotchie · 06-08-2007, 11:05 AM

I suppose my next question would be: How do you fill out the price/offer portion of the contract? Do you just leave it blank and refer to the attached lease-purchase addendum?

If they decide to purchase 6 months from now but the market price of the home has decreased, is the offer able to be renegotiated by the buyer?

JimOlenbush · 06-08-2007, 11:21 AM

To answer your other question about commission... you don't get paid until it closes and funds, and there is always a good chance it will not. So, it is not an exciting transaction for us. Is there a reason they cannot get a loan now, and will that reason be corrected in 6 months?

For the contract questions we need someone that is familiar with your state's contracts, but I am sure you don't leave the price blank. That is the contract that it will close from eventually. The buyer could try to strike a new deal in 6 months, but the seller doesn't have to renegotiate and the buyer will lose their deposit if they don't close. Same as a 30 day closing, there is a contract in place, just with a longer period prior to closing.

Saodavi · 06-08-2007, 11:22 AM

These can get complicated and you should probably have a lawyer draft this and it's terms. I doubt there are "standard" lease-purchase contracts in your state.

I believe Lease-Purchases are illegal in Texas now. They are very easy to abuse and many sellers take advantage of less-than-savvy consumers. Obviously your state may have different laws.

There is also a difference between a lease-purchase and a lease-option. The primary difference is that the lease-option give the tenant the option to buy at the end of the lease whereas a lease-purchase requires that they buy.

To protect a seller, the lease should have terms that generally state:
1) the tenant is renting for XX months
2) tenant has NO equitable or ownership position in the property and is strictly a tenant. He has no rights beyond that of a normal tenant.
3) a breech of ANY portion of the lease invalidates the right to purchase and is cause for termination of the lease
4) at the conclusion of the lease, the tenant has the right to purchase the property for $xxx,xxx under these terms (list terms, dates, times, etc.)
5) If the tenant fails to purchase the property, landlord may terminate the tenancy by providing notice ....

That's generally it. Basically, if you represent the seller, you want to slant everything in his favor. Lease-Purchases are really easy to screw up and can go wrong in lots of ways if not properly drafted.

Saodavi · 06-08-2007, 11:27 AM

Sorry, I missed that edit. Like Jim said, unless you've arranged otherwise, you're not getting paid until closing.

Also, keep an eye on the transaction. There's a good chance that the seller will try to close this deal without you and cut you out of the picture. Make sure your listing documents are properly drafted to account for the extended dates on the contract and closing ... especially any "protection periods" regarding the property.

JimOlenbush · 06-08-2007, 11:34 AM

Quote:

Originally Posted by Saodavi

Make sure your listing documents are properly drafted to account for the extended dates on the contract and closing ... especially any "protection periods" regarding the property.

Good advice!

mkrotchie · 06-08-2007, 11:43 AM

Great advice guys, I appreciate it!

Joshua Sloan · 12:51 AM

I recently went to a class about how to do Lease Options. They recommend you get paid three times.

1. From the deposit
2. From the lease agreement
3. When the option comes up and the buyer closes on the property

EDIT:

As far as the agreement goes, I would assume that every state is different. I would check with your broker or the board to find out if there is a Lease Option Agreement that you can pick up. I would never leave anything blank, especially price, on an agreement.

All the buyer is doing is makeing an offer to purchase the home at an upfront agreed on price and length of the lease (of course there are other details...rent, how much is going towards purchase price each month...) between them and the seller. At the end of the lease term, the buyer has the "OPTION" to purchase the home or walk away. So if the price drop significantly, either re-negotiate the offer or have the buyer walk.

In terms of financing, the buyer has to obtain a loan for the purchase price that was agreed upon. Usually the reason people do Lease Options is because they're credit isn't good enough to get a loan at the time, yet they have the money. The Lease Option gives them and opportunity to make an offer on the home in the current market, then lease until they get their credit up to snuff, then when the option comes up, they can purchase the house at the agreed upon price (hopefully below the now current market value).

Hope this helps!

mkrotchie · 06-09-2007, 07:28 AM

Joshua it does help, thanks!

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