Is the lease purchase back? Oh, I hope not

Real Estate Agent with RE/MAX By The Bay, Daphne Alabama

"Would your sellers consider a lease purchase?" two separate agents have asked me in the last two days on two separate listings.

And each time, I've explained the pros and cons of such an arrangement to my sellers. Both sellers passed and here's why.Rolling dice

First, the Wikepedia Definition: "A lease purchase contract (or lease option contract) is the abbreviated form of the appropriate term lease with option to purchase contract. It is a form of real estate purchase which combines elements of a traditional rental agreement with an exclusive option of right of first refusal to later purchase the home."

The initial challenge of a lease purchase is to make sure everyone knows what they are talking about, even the agents. Often, the buyer is thinking "lease with option to purchase" while the seller is hearing "purchase with delayed closing."

This hybridized contract has come and gone over the years, most recently with the soaring interest rates in the ‘80s, and now with the difficult market we face today. It's a product of desperation, really no better than simply renting a house. In the end, it's like like trading in house futures.

Here's a typical scenario:

Mr. Buyer has a home on the market in another city. But his job - and the kids' school - starts in your market in one month. He wants to get his family settled. He's found the perfect house for $200,000.

Mr. Seller is thinking about building a $300,000 house and has his house on the market. It's a slow market, a soft market and maybe he'll get full price if he agrees to this lease purchase. Mr. Buyer comes along with the lease purchase proposal. Ms. Seller thinks he can rent elsewhere and get started building his new house. The agents negotiate the offer - one part lease and one part purchase -- with Mr. Buyer providing $10,000 non-refundable earnest money if he doesn't close within the year. (In some cases, Mr. Buyer will want a portion of his "rent" applied to the purchase price.)

If you can get past the obstacle of Mr. Buyer agreeing to non-refundable earnest money, then on to the more mundane home inspection issues, here's what the principals and agents could encounter.

Benefits to seller:

  • Possibly higher selling price.
  • Cash flow, particularly if property is vacant (which is why this may be attractive to some builders.)
  • House is under contract (maybe or maybe not)

 Cons for seller:

  • Equity still tied up in house and seller cannot proceed with his plans to buy, etc.
  • Housing prices could rise and the seller is locked into a lower purchase price.
  • Market could decline and tenant/purchaser decides house is not worth agreed upon price. Or tenant/purchaser may find another house they like better in the interim.
  • Interest rates could rise and tenant/purchase may not qualify for a loan.
  • Tenant/purchaser may not keep up property.

Benefits to buyer:

  • Making only one move saves time and money vs. renting, buying and moving again.
  • Buyer gets to shakedown period to really figure out if they want to buy this property.
  • Housing prices could rise and tenant/purchaser now finds he's made a pretty good deal.

Cons for buyer:

  • Locked into agreement and they decide house is not worth price or find another property.
  • Interest rates could rise and tenant/purchaser sees his payment going up when the house closes.

Money always talks and in this case it's the $10,000 non-refundable earnest money that's keeping this deal together.

The longer the terms of the contract, the more likely that housing and financial markets will change, making what once seemed like a good deal, merely a memory.

 For agents, it's a lot of work with little promise that the house will close. Chances are, no one will be happy. Not the buyer. Not the seller and certainly not the agents.

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Janet English

RE/Max By The Bay

 (251) 591-2411



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Lorrie Semler, REALTOR® in the Dallas area. Call/text 972-416-3417
United Real Estate - Addison, TX
Real Service. Real Results. Real Estate

I've got a listing now that had been on the market last year and supposedly was a lease purchase.  The buyer's earnest money cleared, but the next check after that bounced and the sellers ended up evicting him and putting the house back on the market.

Jun 11, 2008 12:30 PM #1
James Wexler - Scottsdale, AZ


Great piece.  The lease to purchase option has some real benefits to both buyer and seller.  However as agent, while I have only done a couple of these, it is a lot of work and very few of these ever end up closing for a slew of reasons.

by the way, Do you have an outside blog that I can add to my Blogroll ?

Thanks and look forward to reading your thoughts on the world of real estate.

Jun 18, 2008 10:41 AM #2

Does the agent receive a comission off a lease with option to purchase?

Dec 11, 2008 12:25 PM #3
Janet English
RE/MAX By The Bay, Daphne Alabama - Daphne, AL
Market expert in Daphne, Spanish Fort, Fairhope

An agent typically receives a commission when the property closes. An agent could also negotiate a commission (probably called a referral in this case) for putting a buyer/leasee under contract in a home.

You didn't ask this, but I should address the agents' perspectives on getting paid regarding a lease/purchase. One could argue an agent would be biased against a lease-purchase, because they don't get their money for months if not years. But that argument doesn't really work since agents also do new construction purchase agreements and don't get their money for months ... but the properties do close. The chances of a lease/purchase closing are very slim.

Dec 12, 2008 11:01 AM #4
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