Lease Purchase
How can I rent-to-own or use a lease-purchase to buy a house?
By
Sep 16, 2005, 18:25

A lease-purchase agreement, also known as rent-to-own, is viable option when someone wants to buy a property but isn't quite there yet. Or they find a house they like and lease the home until they have saved up enough money for down payment to qualify for a conventional mortgage.

There are a few key ingredients to making successful lease-purchase. Typical lease-purchase agreements have the renters agree to buy the house they are living in at particular price at a future date, say two years from now. Also, each month a portion of their monthly rent payment goes towards the down payment. At the end of two years, the borrowers retrieve their down payment monies from the owner and then qualify for a conventional mortgage from a mortgage company. So far so good, but if the agreement is not drawn properly, the buyers could be out both the house as well as their down payment savings.

Popular lease-purchase agreement have to set their rent payment up each month independent of any portion that goes to a down payment. That portion must be above and beyond the current market rents for the area. If your house is a two bedroom houses and two-bedroom house in the area rent for $750, then anything above the market rent can be considered yours. If you pay $950 each payment, then $750 will go to rent and $200 will go to  your down payment. If your monthly payment is not over and above market rent for your area, it's possible that your lender won't count any of that $200 and instead look upon it as either rent, or a $200 gift each month from the seller of the property. Gifts have to come from relative or qualified institutions. Further, extra payment need to be held in a separate account by your landlord and not commingled with his or her general account.

Lastly, there is the agreed upon sales price of the home. Let's say that two years ago you agreed to buy the property at $150,000, but since then property values have steadily declined; today the home is only worth $120,000. Remember that lenders use the lower of the sales price or appraised value when making loans. You will need to come up with the $30,000 difference or re-negotiate. If the seller doesn't want to renegotiate, you are mostly likely out of the deal and lost all your money in the transaction. Don't let this happen.

In your original lease purchase agreement with the owner, don't agree upon a certain price. But instead, agree upon a price that has to be justified by an appraisal. That way, the protection works both ways. It works to your favor in times of property devaluations and works to the sellers favor if values increase. Lender can be leery of lease-purchase deals, so it's mandatory that everything you do is documented and both you and the owner follow the prescribed procedures.