Home : Blogs : Christopher and Stephanie Somers - Realtors - Philadelphia Real Estate : The Philadelphia Real Estate Blog

Lease Purchase - what is it and how do you do it ?

What do you do when you cannot sell ? Philadelphia Lease Purchase Options

In this market, people need options. What do you do when you cannot sell and do not want a traditional rental ?

Chris and I do a lot of Rent-to-Own or Lease Purchase contracts in Philadelphia. The rental price of a Lease Purchase is determined by 2 main factors: 1) the monthly mortgage and expenses for the seller and 2) the fair market rent for that area.

Lease Purchase or Rent-to-Own contracts usually have an incentive attached to them. Two examples of the incentives that we have negotiated on the Lease Purchase contracts have included the following:

1) A one-time lump sum of money that would be required at the signing of the Lease Purchase agreement. That lump sum would be put into an escrow account. This up-front lump sum will be returned to the buyer/renter as an incentive to buy. That money acts as a security blanket for the seller in case the renter never buys at the end of the rental term. Typically if the renter does not purchase the property, all or most of that lump sum money is not refunded to the renter.

2) The other way is where the rental amount is slightly inflated and a reimbursement of a large percentage of that rent is reimbursed to the renter/buyer at the time of settlement/closing. If the property is not purchased at the agreed upon time, then the renter will not collect their reimbursement. This is a superior option in our opinion since few people can come up with the cash needed for the lump-sum option.

We have implemented this option for the Lawrence St Condos in Old Kensington - Philadelphia. We took a vacant 10 unit building over from the prior realtor and got it to 90 percent occupancy in six months !

The Lump Sum incentive or the Rental Reimbursement incentive is necessary to protect the seller. Remember their intent is to SELL the property not to rent it. The owner gives the consumer an opportunity to fix their credit, save up more money for a down payment, or work on their eligibility to procure a loan during the months they are renting. The reward for the renter is the reimbursement they get at the end of the rental period.

These days we are seeing owners extending their Lease Purchase options from the typical 1 year lease to 2 years as they patiently wait for the mortgage industry and the consumer to get on the same page.

As Realtors we kind of take a back seat in this process since we do not get paid until the property sells outside of one months rent when the lease-purchasor moves in. Chris and I believe that Lease Purchase options are a generous and very real alternative to simply renting a home or having a home sit on the market forever. Lease Purchases are best for serious buyers who know that they want to purchase a home but need time to get their finances together.

Stephanie Somers

If interested in knowing more, contact Chris and Stephanie Somers at 215-400-2612 or thesomersteam@yahoo.com. Also, if interested in buying or selling or utilizing lease purchase in your marketing plan, contact us.

The Philadelphia Real Estate Blog

Click here to receive our blog updates via email !

Feel free to subscribe to our blog or our monthly newsletter to stay up to date with our latest posts and information on the Philadelphia Real Estate Market. You can also sign up to receive the Philadelphia Real Estate Blog via email.

Posted by Christopher and Stephanie Somers - Realtors - Philadelphia Real Estate on 11/10/2008 08:00 PM

Comments (54)

Lease Purchase Agreements in the Home Selling Channel

lease purchase, renttoown, marketing strategies, philadelphia real estate, home selling, home buying

Originally posted at: The Philadelphia Real Estate Blog: Lease Purchase - what is it and how do you do it ?

Generate short URL

This post has been included in Pennsylvania Real Estate News Philadelphia County, PA Real Estate News Philadelphia, PA Real Estate News
Post is included in group: New Home Sales
Post is included in group: Realtors®
Post is included in group: RE/MAX Active Rain Bloggers
Post is included in group: The Lounge at Active Rain
Post is included in group: The Ninety-ninth Percentile

54 Comments on Lease Purchase - what is it and how do you do it ?

NOV

2008

Lease purchases are very popular in this area, I can see them becoming more popular. But in reality, we can see sellers with vacant homes ending up to just rent.

Stephanie, I bought my house on a lease purchase, and it worked well for all of us. That was in the early 1980's when the market was almost as screwy as it is now.

Brad and Angela - Is an interesting option that we think will gain more traction. Not suprised they are popular in your area. Sellers will obviously just rent out there properties, but this provides a very attractive 3rd option - to both a seller and a buyer.

Patricia - That is awesome. It is hard to believe that the market was screwier in the early 80s than it is now. Is good perspective that you must have !

Christopher and Stephanie:

Another old dog out again. We use this heavily in the late 80's early 90's slow down. It was a lead in to get deals together and get rent flowing. Usually some money up front, not necessarily big, but more then security and first month. A slightly higher sale price than it would sell for cash and a slightly higher rent. The idea was, over a period of time, the credits would eventually create a down payment. They do work, with the right people. You must control your comp's for appraisal purposes.

Richard

NOV

2008

Brad and Angela- In Philadelphia the Lease Purchase trend is relatively slow to catch on. Our marketing team member Liana mentioned that where she lives in the DC area, Lease Purchase is quite popular. We think that it is a great option in this particular market terrain where there is so much supply to manage.

Patricia- Your story is a great one. Perhaps it is time to dig up and dust off those old Real Estate tools that have the potential to work. We hate to repeat ourselves but it is all about OPTIONS. The more options we can offer our clients the greater potential we have in helping them and improve the industry.

Richard- Your comment bring up a VERY important fact that we did not mention in our Lease Purchase posting. Comps for appraisal purposes. We mentioned the the seller determines a rental amount that may be inflated but what we did not mention was that the actual sales price may also be slightly inflated as well. If the seller sets a sales price that is over market value, it will not appraise and the buyer will not be able to make the purchase. That is a scenario that must be prepared for when writing up the agreement of sale. So, if you are contemplating buying through Lease Purchase or you are a Realtor considering preparing a Lease Purchase, it is important to create a protective clause in the agreement that allows the buyer to renegotiate the sales price if the appraisal comes in low. Another option would be if the appraisal comes in low, the seller will reimburse an agreed upon portion of the escrow held or a portion of the reimbursement that was promised.

Thanks for your comments.

I've done several lease options in the Kansas City area. Many of the people I talked to want to buy a house but can no longer qualify for a loan. Just last month I closed on a on a house that had been sold on a lease option. That particular couple only had to lease the house for 3 months before they could buy.

NOV

2008

Justin - Thanks for sharing ! That is a great story - leasing the house for 3 months before purchasing ! Thinking outside the box probably helped that deal get to closing instead of blowing up ! Great job !

Hi Christopher and Stephanie: Yes I have started doing a few of these too. I prefer them to a land contract, especially in this market. It's in my opinion, much better for the seller to not transfer anyone ownership and see if they potential buyer makes the rental payment and in the process they build up rebated down-payment to make the lender happy too.

Thanks for sharing. I do not do lease purchases because so few ever close. I do like your explanation of the term has to be longer - that makes a lot of sense in the current market!

Mary - Yes, it does work. It is thinking outside the box for a deal that benefits all the parties.

Jim - I hear you. They can work though. At least for compenation for us, we get the first months rent up-front. So far, we have done higher price deals where the lease purchase rent is over a $1,000 so with some volume, it can be worthwhile for the time involved.

100% of my business here in Ca. is L/O's. Being a Buyer's only agent and L/0 specialist I pretty much dominate my market. Some agents are calling me to help them with their listings. Problem is-unless your dealing with High End Properties, there isn't enough $ to split. Yes you do get paid your commission when the option is exercized but the reality is unless your deligent with the buyer along the way-most options never get exercized. Because I've been doing options for a long time, both as a Investor as well as a agent, my contracts have alot of incentives in them for the buyer. Most Investors don't really care if the option gets exercized-they just get the property back and do it all over again. Home Sellers however, don't want the property back-so overcomming that objection must be addressed. The other one is; The buyer/tenant is locking in today's price for the duration of the term. So the objection is: What if prices go up! That's not a big concern here in Ca. but it may be in your market. As a buyer's agent I want at least a 3year option. No less than 2. Reason: Once the seller converts their primary residence into a rental/Investment prop. the seller is entitled to many tax benefits and writeoffs to offset the income, depreciation is a big one. If the buyer doesn't exercize the option (3yrs) the seller can regain the home as a primary residence and still qualify for the Capital Gains rollover exclusion ($250K single/$500K Joint. One final comment! Seperate the Rental Agreement from the Option contract so the buyer can record the option/lien on the property. Also hire a escrow company to handle all the $. In & out. That way you know the sellers Mortgage payment is being made on time. L/O are win-win, especially in todays market-Just make sure you acquire the right knowledge.

Mathews Reality Advisors

Matt - that is a great response ! That strategy / option should be a blog post for you ! I know the options are more so in California and I have that seen that less over here in Philadelphi - love the idea though !

I think the big picture is to be thinking outside the box to help more potential buyers and sellers in this difficult market environment.

Thanks much. As a matter of fact, I'm preparing my first blog on the subject matter. Hope agents join in. I've found, however, in my neck of the woods, most agents (lots of em) are stuck in their old ways. Put a sign in the yard and hope for the best. I can't tell you how many listing agents give me a hard time when I try to find out how flexible their seller is. Why are they selling. Do they need all their equity in cash? Bottom line is; they are looking for instant gratification $ in their pocket. It's for that reason that I focus on FSBO, Landlords, and expired listings only. The amazing thing is; the sellers love my program. Be looking for my blog soon. Take care! Us L/O experts need to stick together. By the way-Born and raised in Pa. Leechburg. Brother's a Retired State Police!

NOV

2008

Lease to own is not popular in North East. maybe that is something or some potential?

Huiting,

The presentation is the Key! Your seller's hot buttons must be addressed. That takes a little fact finding on your part by way of asking questions to qualify the prospect. The ideal candidates I seek out have owned their home or Investment Property for at least 10yrs. Ready to Retire, Already Retired and looking to move on. Retireing landlords are ideal. Big reason? Mortgage has been paid down and they have lots of equity. Problem is they are house rich and cash poor so to speak. They want to sell for a good price but more importantly they want/need monthly cash flow Income. Taking all the cash in a lump sum causes all kinds of tax problems/Capital Gains, recapture depreciation writeoffs etc. Not to mention-Where could they Invest that money in today;s market and receive 7-8% net monthly cash flow income. plus deferred Capital gains taxes. As you can see there are exceptional benefits both to the buyer and the seller. In today's market-L/O's make a whole lot of sense when you sell the Benefits.

Great information for those looking into this type of transaction.

This is great that there is very informative dialogue here regarding the lease purchase options. It certainly can be a great fit that benefits all of the parties. Is an option that agents should become more acclaimated with.

NOV

2008

Stephanie,

Thanks for the post. I like the way you have presented this information. Good advice and a great read for those yet to have performed a lease with an option to buy.

Hi, thanks for a great post!

Question to ya: If you had to go with the lump sum incentive- what would you recommend as an appropriate amount? Also, was interested in knowing what version of the L/O agreement you use for your transactions.

Thanks!

Odelia

NOV

2008

The lump sum in a L/O is just like a downpayment. It goes against the purchase price when the option is exercized. Also a certain portion of the rent $ also gets credited to the tenant/buyerwhen they exercise the option. A rule of thumb is; 3% Option money/Lump Sum, plus first and last months Rent(Ca. only) Some states still allow a Security deposit plus 1st & last. Keeep in mind-everything is negotiable and usually must be in order to consumate a win-win deal. As far as contracts go. I use two (2). One standard month to month rental agreement and a separate Option contract agreement that also includes at the bottom a place for me/Broker to add my compensation terms and how I am to get paid.

Yes, we use the standard agreement of sale in PA and a lease. We will have an addendum for the lease purchase aspect.

As for lump sum, we just did one where it was $10,000... as the prior poster said, everything is negotiable. Most of what we have done with the Lawrence St Condos is not a lump sum but have negotiated a rent reimbursement so the tenants are building equity as they are paying rent. The lease purchase price was agreed upon in the beginning.

Hopefully we can get AR onboard to trade/sell points for referrals or sure leads.

Very interesting stuff here. I have worked hard for one family for a long time on a least purchase. It has been very difficult

Thanks for the information here

Thanks

Don

Castellum - Like the idea ! Is good to think outside the box !

Don - It is interesting stuff, isn't it ? Especiall in this market I think it is important to think creatively for solutions that benefit alll the parties involved !

NOV

2008

I am really considering lease purchasing of a house in Phil as my credit is not the best. I work in NYC but am living in a rental in northeast Philly. I really would love to purchase a home but I do need time to correct some items on my credit report and besides my childred just found jobs here-I have been handling all the bills here on my own-I would love a 3 bedroom 1 and half to two bathroom house with a finished basement with bath-large backyard and open front porch-preferrably in the northeast but will consider other areas as I need to be able to get to bus to NYC. HOusehold income monthly at this point is 3,000-not taking into account my two children have just started working and not sure what they will be bringing home-I hope you can help me with this-I have signed up on other sites but yours seem the most promising. Thanking you in advance for you help and guidance

Blanche Hamilton

Blanche,

Thank you for reaching out to us - we look foward to speaking with you.

I would suggest to contact us at the office (215-400-2612 for Chris, and 215-400-2620 for Stephanie) or email us directly at thesomersteam@yahoo.com . Let us know how we can contact you to go over your goals and your situation. You can also go to our site at Philadelphia Real Estate - Chris and Stephanie Somers search for properties and contact us there.

NOV

2008

1. When you do Option 1, do you open a fresh escrow account just for this buyer, and is it interest bearing?

2. How do you get paid? At the end of the lease? Monthly when they make their payments? Up front lump sum?

Thanks for this post

Erica

Erica,

1. Yes we will deposit into an escrow account and have it be released accordingly. Another option is to have an amount paid directly to the owner and reimbursed when they purchase.

2. We will typically get compensated one months rent up-front and then the real estate commission when the deal settles.

NOV

2008

I've commented several times here and finally realized (my fault), that the subject matter was about using a Lease Purchase Contract apposed to using a Lease Purchase Option. They are similar in most aspects, however, the one most important difference is that the Buyer under a Lease Purchase Contract-must purchase the property on a set date agreed upon. A Lease Option on the other hand allows the tenant/Buyer to walk away from exercizing the Option. In which case the seller gets back the property and the buyer forfeits the orignal Option $ plus any rent credits given. It's also important to know also, that several states now have adopted specific rules pertaining to Lease Options due to Investor/Scams. Bottom line is; Know the rules for you state and also know the difference between a Lease Purchase and Lease Purchase with Option to Buy!!!

Matt - good point. The bottom line is that a deal can be structred that can benefit all the parties involved. Also, it makes sense for both buyer and seller to have realtor representation.

NOV

2008

I agree totally that a deal can be structured to benefit all parties. That's the beauty of using Lease Options-everybody wins. However, my experience over the years has proven that the fewer people involved in the transaction the better. The most suscessful win-win deals I have done have been when I seek out and find FSBO and/or expired listings. Unless your dealing with High end $ properties there usually isn't enough money to split. The other reason is; most listing agents for the most part don't want to wait for their commission and are not open minded to alternative selling stragtegies nor do they have the expertise to give a compelling presentation to the seller showing all the benefits involved in such a transaction. If another agent is involved I always make it a must that" I" make the presentation to the seller. Not to mention that I also have to educate the agent first. It should also be noted that I work with several Investor/buyers who like to use a Lease Option with a "sub" lease option to purchase the property-This type of transaction is virtually impossible to consumate when another agent is involved. Bottom line is: Whether your working for the seller or the buyer-Keep it a one agent deal if you can. Just my opinion of course.

JAN

2009

This is something I think I will look into. The market is really slow in eastern NC. I will definately have to do the research and figure out a marketing plan first though. Thanks for the post.

JAN

2009

dear chris and stephanie

i am a begginner investor i have been searching a lot of property and market as well

i need some advice , what should i start with in this kinda market , should i rehab houses flip and sell or should i buy foreclosure and rent it or rent to own it , and if i do rent to own how does the whole process work

thanks and will be waiting for you reply

shawn

Shawn, Feel free to contact us at our site Philadelphia Real Estate - The Somers Team. We work with a lot of Philadelphia investors. You can also check out our investor site at Philly Investor Hub .

The market right now does not work well with rehab and flip. So the best option is buy and rent. The properties you buy can be a foreclosure, but it can really be any property that it a good deal that provides monthly cash flow as well as appreciation potential !

We look foward to hearing from you !

FEB

2009

Hello,

In my area, no Title or Escrow company, wants to insure a lease option contract. Do you know of a Lease Option Form we can use to protect both buyers and sellers. How do we make sure that when the seller defaulted on the mortgage payment the buyers will be protected? Who are the best lease option sellers candidates? In my area, SF Bay Area not too many homes are paid for but there may be some candidates for sellers who want to sell now although they still owe some mortgage. Do you know an escrow company or title company who can handle this kind of transaction. How do the title or escorw get paid? Any educational seminar someone can recommend to get more knowledge regarding this niche? Thanks.

MAY

2009

Hello: I am also very interested in purchasing, but a restaurant using this kind of option. I do need help/the realtor listing it is talking the seller out of it & does not want him to do it (the property has been sitting close to a year now)-but seller is very interested and agreed he would do that. The original Realtor listing the business says he would write up the offer-but we need to go to a laywer for the land contract part of it. (The owner is not familiar or wants to write a LEASE-but comfortable with a land contract) So what is the difference in the two. Is it similiar on how it works?? What should I do, I do not want to lose the opportunity and would like to jump on this as quickly as possible. Do I need to find a Realtor as a buyer agent or hire a lawyer? The owner thinks he needs to pay the realtor listing his property now and that is why he wants more down. I'm located in North Central Wisconsin and need help ASAP! Please get back to me or refer me to someone knowledgable and comfortable in this field. Thank you so much for all the wonderful posts.

mjomonty@gmail.com

715-427-5968

mjomonty@gmail.com

715-427-5968

JUN

2009

Awesome, awesome post and comments! Love the spirit of everyone participating. Exactly what is needed when endeavoring into an outside-of-the-box solution!

Matt Matthews - love ALL of your comments and am with you 100%. We've been doing lease options for years with tremendous success. And yes, it is much easier when fewer folks are involved and quite honestly, the ones where agents were involved were tougher and more complicated than they needed to be, but that's okay. The deal got done. But honestly, we prefer no agents to be involved.

Now having said that, I am determined to make this deal work for agents!!! I am not an agent myself so I'm only guessing that the expired listings or about-to-expire listings are VOLUMNOUS these days and otherwise are dead deals with the commission potential lost or soon-to-be-lost.

Although I think a realtor should be ok with receiving half of first month's rent on the front end and the remainder of their commission on the back end, in reality I'd get tired of this myself and I wouldn't be that incentivized to be of any assistance overcoming whatever obstacles are keeping them from the closing table.

Outside of the box idea: Split the non-refundable option fee upfront. I believe this can be done and all incentivized even when our company & 2 agents are involved.

Example: Buyer's agent client didn't ultimately qualify for the loan and needed more down than he had to close the deal. OR

Example: Seller's agent client's house did not appraise for the amount needed for the Buyer to get funding (although the Buyer was qualified).

Solution: agents pull in our company to set up the Rent-To-Sell / Rent-to-Own transaction. And yes, I absolutely, positively do NOT recommend agents try to coordinate this without knowing how to do it. If seen agents get themselves into quite a mess setting up with one contract, setting it up as a Purchase With Delayed Closing, setting it up as two contracts but not properly, and each transaction is very different and unique from the last. Let us walk you through a few of them and then you can probably do this on your own (and therefore get a higher split!).

So let's say the Buyer has $6000 to put down...that's $2,000 for our company and $2,000 for each agent. Or if there's only one agent involved, it's $3,000 each. Whatever scenario, each agent receives the BALANCE of their FULL commission when the property sells to the Tenant/Buyer.

I think the lowest we've ever gone is a $3,500 option fee for a $110,000 house. I think $1166 each is still worth while in that example.

Assuming everyone is on board and cooperating, do you see any reason why something like this can't be transacted? I don't unless there's something that an agent's brokerage would frown upon or not allow getting that much money up front???

On my way to check out your Blog, Matt. Thanks, Stephanie, for a great post!

In regards to post made about Title/Escrow servicing a Lease option contract!

Any title/escrow company can service a L/O contract. The incentive for them is the fact that they will receive an ongoing monthly FEE INCOME during the L/O term. The service they render is similar to a property management company in that the seller now pays the mortgage payment to the Escrow company instead of the mortage lender. They are responsible for all monies in and monies out. The Buyer will be notified immediately if the seller is late or doesn't pay the mortgage payment. In addition, the OPTION should be recorded, which becomes a lien against the property should the seller default. Likewise, notification to the seller if the L/O buyer is late with their payment.

Finding and hiring an escrow company may require you to educate them and point out the advantages (FEE INCOME) etc. Ongoing L/O transactions can add substantially to their bottomline $$$. Due to consolidation in that Industry however, you may need to make a few calls to find a good one that knows L/O. They will already have a fee schedule in place.

Shannon & Keith! Mathews with one "T" please! Just kidding, I'm use to it.

Sorry about the Blog! I've been working on it for quite some time now, made so many changes I gave up for a while. Never fear however, IT WILL GET DONE!! Your ideas about Agent commissions etc is good. I'd take it of course, but from experience, Agents/Brokers want to get paid their full commission out front. Although in today's market, more and more agents are finally getting educated and starting to see that a little bit now and a lot more later is a good thing. The problem for the agent is in the fact that most L/O's (70%) never get exercized. The other problem stems from not being able to stay involved with the transaction during the L/O term. to make sure the tenant/buyer stays in the game so to speak and can get qualified for a loan when the option comes due. Needless to say their are many variables to consider as an agent and things that can go wrong over the lease option term. The other thing to keep in mind is that the Agent doesn't own the listing-The Broker does. No matter what is negotiated with the Agent-the Broker still gets their % split from the seller side of the deal. That must be taken into consideration when you work your who gets what $$$.as shown in your post. As an Investor, I find out, How much $% is paid on the seller/listing side of the agency contract. Then I negotiate that % as acceptable and pay it all out front. It keeps it simple and everybody happy.

Hi Mat Mathews (note the one "T")! ;) Thanks for the reply! Can't wait to see your blog when done! ;)

What is up with this over-inflated sense of entitlement with agents? And I hear this mostly from agents talking about other agents, not just consumers.

What I mean is, why would an agent EXPECT/DEMAND to get their full 3% commission up front with a rent-to-own transaction??? Isn't technically their industry standard full commission rate 50% of first full month's rent for placing a renter, since that technically what it is at the start? "Technically" they should be happy with that...I'm just trying to sweeten the deal because we all need to work together. Same goes for the broker. Bottomline, they (listing agent/broker) have NOT procured a BUYER....YET. And if there's a buyer's agent involved, the listing agent/broker didn't even procure them PERIOD!

I don't mean to be taking this out on you, of course, and I hope that's not how my rant is coming across. I think what you are stating is probably accurate and is taking me back to what you said earlier that it's best to deal with FSBOs and expired...i.e. no agents involved.

But I gotta ask...is your strategy of paying out the listing side in full up front just so they'll get out of your hair? Can't blame you for that (even though IMO they TOTALLY haven't earned it and it's a shame should they demand it), but if the numbers make sense and you can do it, it's probably money well spent. So sad if that's your reason for doing it.

And is there some real estate agent rule that they can't stay involved to help along the eventual purchase??? Or are you saying that in reality, most agents are not willing to INVEST some time in assisting the eventual sale?

You're right about how many actually go to sale...at least the first go round. For me it's 35% success rate with the first couple. I've only had one house turn over THREE times and finally the 4th family did indeed purchase the house. But all of my lease options did eventually work out albeit with extensions.

But it's still blowing my mind that agents would walk away from $2,000 or $3000 today...with a 20-35% chance of getting $4,000 or $9,000 later (average sales price with mine is $200,000), ESPECIALLY when they've got a resource (our company) that can for the most part set it all up and do all the work to get the deal done initially. And even MORE especially when the other alternative is to receive NOTHING, ZIP, ZERO, NADA...comprehende???

Man, I'm going to end this comment as I'm getting depressed. More later. I still haven't given up seeing if I can get this to work.

I am somewhat confused now as to what it is you actually want to do or what service your offering. We should perhaps discuss it over the phone so I can better understand how an agent would benefit from your program.

I would also like to help you better understand the responsibilities and legal issues of what is required when you hold a Real Estate License. Some of your comments made in your post leads me to believe that that may be whats needed to get you un-depressed and moving forward with your business plan.

Matt Mathews

Mathews Realty Associates/Buyer Agent-Investment Specialist

Hi Matt,

Yes, I would definitely appreciate being schooled in legal issues for agents as that is something I don't have much training or understanding in outside the obvious. I know our agent freaked out big time when she made an error listing (listed it with central AC, but there was no central AC) and we had an offer on the table.

Another thing I didn't know...our agent has to pay for her own signs...sign, post, labor to put up and labor to put down to the tune of $140 per listing that her brokerage does not cover. I was very surprised to find that out and wondered if that's common throughout the industry.

Anyways, can I call you now? You're on West coast time, right? It's 8:30pm my time. Thanks so much! Would love to clear up any confusion

NOV

2009

I took a tenant to eviction in Landlord/Tenant court in NJ in 2005. Quick and cheap, got Judgement for Possession but did not execute Warrant for Removal because he paid up and bought the house from me 3 months later in a very simple settlement. But in court, the Judge said any Lease with Rent-To-Buy language must forfeit their place on the docket and re-file in Civil Court as a Contract dispute, no matter if the tenant's claim to equity (or not) was clearly defined in the Lease.

So isn't this a significant risk to the Landlord, to remove a late- or non-paying tenant with Lease-Buy terms?

I ask because I moved to tax-friendly DE and rented my home in NJ (could not sell) to a couple who asked for a clause to buy in the Lease. Sales price and broker's fees are in the current Lease, but no more: no equity accrual or rent surcharge.

What is the best way to structure the Lease renewal in May 2010 where they have an incentive to buy and I have all protections possible for a displaced Landlord?

Thank you in advance for your advice.

Sayjaybay-

We typically include a clause that says the lease supersedes the purchase contract and have that signed by all. But the best advice in your situation is to hire a Real Estate Lawyer who understands how language will best serve you in the contract if there are any bumps in the road.

Please share the info you learn. Perhaps a RE lawyer will read this and chime in.

Hi Sayjaybay, what the judge told you is exactly why we do NOT do lease-purchases, nor the commonly used "Realtor Way" of a purchase with a delayed close. Once equitable interest is established in the eyes of the judge, and you have a non-paying tenant, you have to FORECLOSE on them and buy out their interest in order to get them out if they are refusing. What a nightmare.

We strictly deal with lease OPTIONS with two SEPARATE contracts: standard rental agreement and an Option Agreement that is absolutely clear there is no equitable interest and that it is NOT a contract to purchase. The rental agreement makes absolutely no mention whatsoever of the option.

There are other things that can trigger establishing an equitable interest...things like "rent credit" language in the Option, allowing the tenant to make rent payments directly to the mortgage company, even sending letters to them that say "welcome to your new home". Of course, I think these are the worst-case "horror" stories you hear, and perhaps they are exaggerated a bit, but I still give them some attention as the consequence of falling into such a predictament is extremely expensive.

We just made some major changes to our agreements and I spent two hours on the phone with my Prepaid Legal attorney going over each paragraph line by line, which we do every year in response to how judges are ruling and our experiences in rent court. Thankfully we've only had to evict one rent-to-own tenant buyer and we kicked her butt in rent court. She had just graduated from LAW SCHOOL, too!

When I was in SC (landlord friendly) my rental agreement was 7 or 8 pages. Here in Tenant Friendly on STEROIDS Maryland, our contract is 12 pages.

MAY

2010

We need help determining the basic figure ranges for doing a lease to own. Is there any standard ranges for the 1) down deposit required 2) rental amount for the home each month 3) rental amount that is applied as a credit when purchased.

Thanks

Bobby- There is no standard for our leas purchase deals. But here is what we do:

1) Deposit is typically 1 month rent (we use the security deposit as both the deposit and the security deposit for the lease)

- to avoid having to little "skin in the game" for the prospective buyer you could ask for a larger deposit toward the end of the lease closer to the time they will be making their mortgage application. Re-evaluating the agreement of sale at that point is a wise decision to double check on Home inspection dates, mortgage commitment dates and so on.

2) The rental amount should cover the mortgage 1st and then evaluated based on the amount agreed upon for the sale. The rental amount should be at least market value rent. Anything in excess of that can be reimbursed at settlement. It is entirely up to the buyer and seller what is acceptable. Many people like large one time deposits or non-refundable deposits but often times that is unfair to the buyer or impossible for the buyer. It should always be a win-win scenario as well as protective for both parties.

3) The reimbursement can be large or small and anywhere in between. The reimbursement amount should be agreed upon up front along with the sales price and rental amount. Reimbursements can be applied as seller's assist at the time of settlement. The buyer should be speaking to a mortgage professional in advance to prepare for the future purchase.

Stephanie Somers

JUL

2010

I'm looking for assistance in Richmond, VA.

There are many great VA agents on activerain. Give Charles McDonald an email. He is from VA.

AUG

2010

Great post. and Matt Mathews loved your advice. I have done several L/O and they have usually gone for 2 years before the option was exercised. In Tennessee we do a lot of L/O due to the mortgage market.

MAY

Investing in real estate is never been easy, it is very delicate and need to undergo a thorough process. But i think the best way is to go forth with <a href="http://www.leaseoptionarizona.com">lease purchase</a>. In this kind of investment it is mutually beneficial to both the landlord as well as the tenant and can make a lot of people realize their long cherished dreams of owning their own homes.

JUN

I try to do a sandwish lease option in New jersey, some one told me it wasn't legal, how can i find a great lawyer that work with investors, that would be able to show me what contracts i need and exactly what to do, I have no money, no job and bad credit, I need capital.

Leave a response…

Name:

Email:
(optional)

Comment:

What does the graphic say?

Christopher and Stephanie Somers - Realtors - Philadelphia Real Estate

Philadelphia, PA

More about me…

Realtor / Owner - RE/MAX Access

Address: 1033 N 2nd St, 5th Floor, Philadelphia, PA, 19123

Office Phone: (215) 400-2620

Cell Phone: (267) 987-4443

Email Me

For Email Marketing you can trust

The Philadelphia Real Estate market - our experiences, thoughts and insights. Philadelphia Realtor, RE/MAX, Top Realtor, thesomersteam, Philadelphia Living, Philly, title, mortgage, team leader, investor, Philadelphia investment properties, center city, condominiums, new construction, developer, real estate investor, tax abatement, Philadelphia arts, artist, Philadelphia dining.

Christopher Somers

Listings

Links

Archives

Find PA real estate agents and Philadelphia real estate on ActiveRain.

Disclaimer: ActiveRain Corp. does not necessarily endorse the real estate agents, loan officers and brokers listed on this site. These real estate profiles, blogs and blog entries are provided here as a courtesy to our visitors to help them make an informed decision when buying or selling a house. ActiveRain Corp. takes no responsibility for the content in these profiles, that are written by the members of this community.