Lease Purchase - any experience
 

Given the difficulties of obtaining a mortgage with no credit and co-ordinating completing on a house with our date for moving to the US, the above sounds like a great idea. We have found a house where the seller is happy to rent to us for a few months whilst we arrange the mortgage. The rent is fairly high but an amount of this will be applied as a credit against the eventual purchase price.

It sounds ideal for what we need... but i am always cynical when something seems this simple :thumbsup: so is there any pitfalls to this type of agreement that we have to watch out for? I assume that this is a legally binding contract for the seller also - what happens if they decide they want to pull out? Is there anything we should insist on or watch out for?

This would be in Michigan where the property market seems fairly slow at present so i don't anticipate any huge rises in house prices that would cause the seller to want to pull out! (guess we are running the risk that they may drop further and we will be tied to buying the place at a higher price than it's worth).

Re: Lease Purchase - any experience
 

At what point are you committed to the purchase (and fixed on the price, etc?)

Re: Lease Purchase - any experience
 

Not sure yet, husband is speaking to the realtor today - is there a standard way of going about this lease purchase agreement? (it doesn't really exist in the UK beyond a landlord saying they might want to sell at some point in the future and verbally agreeing to give you first refusal if they do).

Re: Lease Purchase - any experience
 

do a lease option (ie option to buy) - simpler and cleaner... but you need to also have it drafted correctly.

Lease purchase/rent to own can lead to nightmares; long story but it can be seen as participating in loan fraud if not handled appropriately. But if its absolutely what you want to do then have an attorney draft the paperwork.

Regardless, look after your interest and for protection, address as a provision of the lease, what is to occur, (esp with your rent and security deposit), should the LL go into foreclosure etc. Personally, I'd have a title company or somesort of escrow service hold the security deposit in escrow with instructions already drawn up.

Re: Lease Purchase - any experience
 

Absolutely. If the landlord gets foreclosed on, you can probably kiss goodbye to all the paid rent absent an escrow account for the portion to be applied towards a purchase. You should check up front that the landlord is not already in default on his loan or property taxes - this info is usually public record; and get an appraisal done to see what the market value of the property currently is. There is no point in entering into an agreement like this only to find out down the road that the house can't be financed due to it not appraising for the purchase price.

And I would be very careful to check Fannie Mae/ FHA regulations on this. These government entities are effectively 95% of the mortgage market right now (either through buying or insuring loans) and they've got super-picky about the source of downpayment funds. And I would also cover your ass in terms of what happens if the market value of the place decreases before purchase, a not unlikely scenario in the current economic climate.

Re: Lease Purchase - any experience
 

Thankyou both - heaps of useful points to consider in there, i really appreciate it.

Re: Lease Purchase - any experience
 

Just something you may want to consider if you're on a temporary visa.

There's a thread in the Immigration Forum where a guy has bought a house before he became a permanent resident. His visa is running out so he will be returning to the UK...he needs to sell the house quickly and a few other things he went into debt for.

This is not the first time one of our members have found themselves in this position.

Re: Lease Purchase - any experience
 

I get asked alot about rent to owns/lease purchases so I will c&p from somewhere else I posted about the subject in hopes that it sheds light on the matter and help explain why its frowned upon... I am not wanting to kick start a whole big debate on the matter but read and think about it as much as one wants; if it is helpful for someone, great; if not, then waste a few minutes read.

Anyway, in a RE update class I took once, the topic about Rent to Own, lease options etc came up as creative financing alternatives.... and the perils which can come up...

in CO (where I am from) we don't have "mortgages" just home loans (distinction being owners here retain title but the lender records the secured Deed of Trust which clouds title until the note is paid and they release the D.o.T on the property - (key thing to note later on!)) Best to my knowledge, everywhere else have "mortgages" where upon the lender/bank retain title until the secured note is paid where upon they will give title to the homeowner - just like your car loan.

With mortgages, you have the legal right to your house due to both the equity right of ownership and possession rights - the equity is yours not the banks thus you have the claim/right to stay in the place you call home and allowed to take the tax deductions too. Loan/mortgage payments are structured, gradulated, amortorized etc (again, which is important to note - because r-t-o, the contract is often created with structured payments too),

It was explained in the class to us that doing rent to own etc is exposing the principle homeowner to an utter nightmare... Why?? In the eyes of the courts, from doing rent to own, lease options etc, one has in affect created a private mortgage with the "tenant"/buyer. The rent paid, often is structured, apportioned etc (just like your mortgage payment with regards to principle and interest). The courts may revere the rent as a private mortgage. So, what happens if the "buyer"/tenant stop paying the seller/owner? The loan is still the property owner's responsibility; so if the loan can't be paid the bank will call the note and likely want to 4close. The 'tenant' has full rights to possession as stated in the real estate contract... (which is also a declared interest in the property) In reality, trying the eviction route could take a lot longer due to the courts being typically booked up. In the meantime, the "buyer" has been living free and will continue to do so until the court hearings etc and final order is issued. Sometimes it could take months. Not only has there been monetary damage but the owners credit potentially is damaged and if there is a potential 4closure on their record - additional nightmare.

Believe it or not this occurs a fair amount. A "buyer" will typically find another owner/seller who is willing to rent to own.. and repeat the whole process all over again. Deja vu?!?!
Motto is - If it looks like a mortgage, smells like a mortgage - chances are it is a mortgage.

I understand the reason why someone would offer rent to own etc as alternative and creativity to 'sell' their property, but why chance having a nightmare on your hands? Its safer to do seller finance (like owner carry) with a buyer merely because the 4closure process is quicker and easier (thus potentially getting the property back) rather than the eviction route should things go array. It was also emphasized in the class that there isn't a real estate commission approved form (at least in our state) with regards to lease options and rent to own (ie they don't endorse it). If you are a Real Estate professional, don't eagerly jump into and get involved with a Rent to own scenerio etc..! I write this as an offering to share information & make home owners alike, aware of the unsuspecting perils you can get into with rent to own scenarios.

For instance, has anyone ever come across a proposal for a R-t-O etc on a property which has an FHA or VA loan on it? Congrats, technically that is loan fraud. Many people don't realize that it is. FHA & VA are assumable for eligible buyers and it is sometimes advantageous in the right circumstances and scenario. The thing which was drilled into our minds is that don't do structured/amortized payments etc with rents because it may be interpreted as a private mortgage. Realtors who try to draft up r-t-o agreements etc... can also face the problem of practicing law w/o a license.

I'm not an attorney so always consult legal consul!!

Re: Lease Purchase - any experience
 

Thanks all for the very detailed responses. Lots of food for thought there!

Re: Lease Purchase - any experience
 

We were in a similar situation - our UK house sale fell through after we'd found the house we wanted to buy, so we couldn't buy immediately.

We rented the house with no obligation to buy it. It worked out very well for the seller because two months into renting the house we bought it, and he got to keep the rent. And we were under no obligation to buy, but were able to move into the house we wanted.

No idea if that helps, but it worked out well for us.

Re: Lease Purchase - any experience
 

I just asked my husband and says our realtor advised us against a lease-purchase contract which is why we just went for a simple rental...

Re: Lease Purchase - any experience
 

Thanks - looks like ours will be similar(ie none of the rent money held against the purchase price, just a straightforward 1 year lease with the option to complete as soon as we can get the payslips we need to provide for the mortgage).