A cunsumer recently asked if it is a good idea to sell a home thorugh a lease purchase. She had been trying to sell her home for four months and was considering an offer from a person who expected a substantial settlement within the next year.
Here is my answer to her; What would you have added that I missed?
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In some cases a lease purchase can be good for both the buyer and the seller. Be sure that you know if you are doing a rent-to-own, rent with option to buy, or some form of lease purchase. There are some similarities, but these terms are not interchangable.
You will want to have your lawyer review any agreement before you sign it. Also, be sure that you check with the lender who will put up the money when she does have the funds ready for her down payment on a convention or FHA loan. The lender should be able to give you a solid pre-approvel with the stipulation that the buyer will have funds available for a down payment. The loan officer may be able to help you structure the agreement so that the bank will recognise part of the payment to you as equity or downpayment when the new loan is written.
Be sure that you address inspections, appraisals, a non-refundable option payment, and a clear understanding of the expenses that each party will pay throughout the lease period. Specify an end date to the option, and clearly spell out what happens if the option is not exercised within the stated period.
You might also want to address what happens if an appraisal done a year from now shows a value that will not support the sale price that you have agreed to today.
The bank will write the loan only if the value remains high enough to be within their requirements for loan to current value.
Here are a couple of other questions that I suggest you ask:
1. Can she document with some certainty that she will be getting the settlement she is anticipating? Settlements from divorce, wrongful death, injury, inheritance, and permanent disability cases are often smaller than anticipated, and often arive much later than the recipient expects.
2. Will you have a monthly shortfall? If your monthly payment is $2100 and she is paying you $1500 then you have a decicit of $7200 per year before you consider any depreciation that may occur in the year. If you would reduce the price by $10,000 would the home sell now? If so, I think you should seriously consider selling through traditional means.
3. Have you consulted your accountant about the tax ramifications of doing a lease purchase or a rent to own. When you sell you will be asked if you have had any rental income from the property. Your answer to that question will determine whether you have any taxes due on your profits.
4. Who will manage the property while this person is renting from you? Will you be nearby to collect the rents and to monitor the condition of the home? How will you know if the home is being maintained in its current condition? If this person does not buy the property at the end of the option time, will you have a harder time selling it because there is a renter in place, or because the condition had deteriorated?
5. Last question.... Has the home been on the market with a Realtor, or have you been going it on your own? It is unfortunate, but true that homes are not selling based on what the seller needs to clear. The homes that are selling are the ones that are priced with full consideration of their value on TODAY's market. I recently showed a client a home that had been on the market one day. The buyer could not move quickly enough to have a chance to buy the home because 11 parties toured within the first day and three offers had been written. So...homes are selling when they are in great condition and priced right.
Good Luck with your decision. Please feel free to contact me with additional questions.
Eileen's Green Team
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