WHY would I want to lease-purchase?!
A lease-purchase is a way for buyers who aren't quite ready to buy a home yet secure one, and save up for closing costs and/or a down payment. This is a great option if you need time to repair credit, save up for closing costs, or try out an area BEFORE you buy!
How does a lease-purchase work?
Once you have identified your home, you would enter into a lease-purchase agreement with the seller. It will detail your rent amount, how much of that rent will be applied towards your purchase, and how long you have to purchase the home. Typically, you make a small down payment. This amount is put into a ‘savings account' by the seller.
Here's an example:
Rent: $1,500 per month
Of that, $300 per month is put into a ‘savings account' by the seller
Down Payment: $3,000
2 years to purchase the home
When you are ready to purchase the home, your initial down payment PLUS a portion of your monthly rents will be applied towards your out-of-pocket expenses in the purchase - closing costs and/or down payment. In the above example, at the end of 2 years, you would have $10,200 saved up! ($3,000 down payment, plus 24 months x $300).
If you are currently renting, and your monthly rent is $1300, all of that rent money is ‘lost' - you will never re-coop a dime! You are simply making your landlord richer.
Many buyers need time to save up for closing costs, or to repair credit - especially with all of the new lending restrictions. Or, if you are new to the Phoenix area, you may be unsure of where you want to live. Lease-purchasing is a great way to ‘try before you buy' - you can make sure you want to make a house and a community your permanent home, before committing to a mortgage.
WHAT ARE THE RISKS?
*Aside from the regular restrictions of a lease, (i.e. penalties if your payments are late, or if you terminate it early), if you decide NOT to purchase the home within the pre-determined time frame, you do lose your ‘savings account' funds.
*Usually, if your rent is late, the amount that goes into your savings account is forfeited for that month.
WHAT ARE THE BENEFITS?
*Lease-purchase rents are often at fair market value - so even if you lose the $300/mo you were saving in the above example, your rent in a regular rental home in the area was probably $1500, anyways.
*You are ‘forced' to save money that you might otherwise spend.
*You can decorate the home as if it is your own - paint rooms to your liking, update, and plant flowers in the yard - remember - this WILL be your home shortly!
*If you are close to being ready to purchase a home, you can go ahead and start living in one you want, rather than move into a rental that isn't your ideal home.
If a lease-purchase sounds like a good fit for you, we have investors that will purchase a home YOU PICK OUT and lease-purchase it to you!
If you are an investor and would like to help others out, feel free to contact us, as well! We will detail advantages to investors regarding lease-purchasing homes in our next posting.
Sharon Kotula, ABR
Adam Tarr, e-PRO