When a Home Buyer or Seller want to do a “Lease Purchase” deal . . .

Real Estate Sales Professionals, Mortgage Lenders, Home Buyers, and Home Sellers frequently rely on a good measure of creativity when constructing a deal that works for all parties.

The collective goal is to find a deal that is agreeable to both Buyer and Seller AND is Legal and Financeable.

From my perspective as a Principal Broker, Professional Coach, and Real Estate Sales Professional, most REALTORS have a love/hate with the fluidity of the business . . . no 2 deals are the same.

The nuances of emotional impact, financial considerations, market dynamics, external forces (Weather, Job market, Macro-economic conditions), personal complications (Divorces, deaths, births, job relocations) all play into the mix such that it’s always this magnificent 1000 piece puzzle in a box that we’re going to try to put together.

Current market conditions in Middle Tennessee are becoming fertile fields for more and more creativity . . . There is an increasing demand for deals by which Buyers not able to purchase NOW can secure a house they love for future purchase . . . and Sellers who are having difficulty selling their house and NEED it to sell or to produce some income.

Many Buyers, Sellers, and REALTORS hear about “Lease to Own” or “Lease Purchase” deals which, on the surface, salve all of their issues . . . The Buyers get to lease the property and secure it for future purchase at a set price, and maybe a portion of their rent during the lease period can be credited towards the down-payment of the purchase. The Sellers feel good with some income flowing in and the comfort of knowing the house is “sold.”

The reality is that these deals often sound too good to be true . . . and result in ugliness. REALTORS report that most of these types of deals fail to close and are BAD ideas because they put everyone involved “in harm’s way”.

We decided to tackle this scenario in this week’s Lunch & Learn . . . Pulled together 10 High-minded REALTORS and brainstormed for about an Hour to see what we could learn from each other . . . and see if we could agree on a “safe” alternative that meets this demand.

I came into the session with 10 questions:

1. What is the Demand?
2. Who “NEEDS” these?
3. Buyers? Why?
4. Sellers? Why?
5. What are the cons?
6. What are the pros?
7. Why do most REALTORS hate/resist them?
8. Why do some REALTORS LOVE them?
9. If you must do it . . . How?
10. How does the REALTOR get paid?

Essentially, we determined that “Lease to Own” agreements CAN work when done “Right” . . . The very tricky part of this is getting it right because of all of the myriad pitfalls and hazards between the time of creating the agreement and the actual closing of the sale.

The pitfalls include:

• Potential Value differences – During the Lease portion of the agreement, the value of the property could change significantly UP (Seller misses out on that appreciation) or DOWN resulting in failure to appraise thereby killing the loan
• Buyer remorse – the Buyer may fall out of love with the house during the lease period
• Seller default . . . What if seller stops making payments on the mortgage and the house goes into foreclosure
• Unforeseen WHAMMIES – things like shifts in the Economy, Job loss, Divorce, death, marriage, birth . . . etc

LOTS of things can happen during the lease period that causes a deal not to close.

Ideas that came out of the meeting:

• Simply LEASE (without blending it with purchase) and give the Buyer a First Right of Refusal to purchase at market value at time of expiration of the lease period.
• Do the blended Lease Purchase with extensive income, credit, and background check on Buyer as well as screening by a Lender to uncover any repairable credit issues. . . AND on Seller so everyone knows that everyone is financially secure going into the deal. Require a substantial non-refundable down-payment
• Lease with an OPTION to buy at a future date at a determined price . . . comes full blown credit and background screening and same on Seller.
• Purchase agreement with Earl Occupancy by Buyer – Risky for longer term possession because it starts to look like a tenant/landlord relationship.

Any way we sliced it, it all boiled down to the need to create a system that covers ALL of the bases. We acknowledged that cannot eliminate risk for any of the parties in these transactions (or ANY real estate transaction) but we CAN significantly reduce exposure to harm with more diligence on the front end.

So . . . DO what you KNOW!

When you’re diving into uncharted territory for yourself, do so with caution and don’t allow over-eager Buyers and Sellers cajole you into creating a deal that’s filled with ticking bombs.

Bottom line . . . It’s not the concept of Lease to Own  – or Lease with Option that’s broken . . . It boils down to thorough diligence and execution.

Done right – It WORKS!

Just sayin’

Best,

b