More on the Lease to Purchase

Real Estate Agent with DeLex Realty

More on the lease to purchase. 

How to set the purchase price? This can be complicated as the purchase may not take place for several years. The way I have personally done this, on a case by case basis, has been based on market inflation rates. I have in the past based my sale price on a 3% increase per year the home will be under the lease. I have found this number to be fair and typical of the Phoenix market, giving the transaction the best chance at success.

What if the price skyrockets or decreases? If the price decreases in price the seller would have the choice to lower the price, hold the buyer to the price or both terminating the deal (depending how the deal is structured, remember that is 100% up to you at the time you draw the purchase). If the home skyrockets in value you may have a frustrated seller and an excited buyer.

Can the property be sold by the buyer? Yes. The buyer can sell the property to a third party, even if the contract forbid the sale. The cleanest way to do this would be with a double closing. Let me explain. When I typically represented a buyer in these transactions I always made sure the sale contract could be closed at anytime prior or on the COE date and the lease would terminate upon the close.

Let’s imagine you represented a buyer on a lease to purchase in 2010 in Scottsdale. The home was priced at $350,000 at the time and it was set to close at $382,454.45, three years later (a 3% per year, compounded sale price). However let’s say the house was worth $480,000 by 2012 and the buyer was not in a position to qualify as of yet.

The buyer may list the home and sell it. They accept a contract for $480,000 and set the close of escrow for May 1, 2012. They would then inform the seller (original seller) of their intention to close escrow early on May 1, 2012. Now, as they contract (if well written by the sellers agent) would prevent a sale of the agreement or transfer thereof, the buyer must close the original transaction before they can sell.

To do so there are several methods, however the easiest is with private hard money. You would approach a hard money lender and ask them to pay the $382,454.45 on May 1st, after the $480,000 had already funded. This all but guarantees the second sale will go through as it has already funded. The escrow officer simply closes the home twice in the same day, pays off the first seller and pays your buyer the difference, less what ever fee the hard money lender would want (normally about $5,000 or less). After fees and costs, your buyer/seller would have net about $60,000.

As I heard multiple times how lease to purchase never work think if you would have represented the buyer in this transaction. On May 1, 2012 you would have earned your original commission of $11,473.64 but also an additional $14,400 for the sale (if you represented the buyer/seller).

While I would 100% agree this would be a rare occurrence, it is not an impossible one. Creative real estate helps differentiate you between an application that simply sells homes. Providing creative options will help you secure more clients, make fans of them and keep those pesky applications at bay.

Posted by

James (Jim) Lord


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