It seems that in the past year I’ve heard a lot of “I was wondering if this property is available for a lease/purchase?”
I’m sure that this comes from consumers who see the value of low home prices, historically low interest rates and the barrage of media coverage on how “now is the time to buy”, “stop paying someone else’s mortgage” and “for what you’re paying in rent, you could easily buy a home of your own”
While all of the preceding statements are 100% correct, the dream of home ownership isn’t always one that can be had easily or by way of the mystical Lease/Purchase arrangement. Personally after nearly 4 years and 100 transactions under my belt, I’ve never once heard of a success story when “lease/purchase” is involved.
There are significant risks to the Buyer and to be perfectly honest, the Seller holds all the cards – they OWN the product that the Buyer wants and they are called a Seller because they prefer to SELL it.
Risk #1 – Lease: in other words, RENT. This is a time period where a portion of the monthly rent is contributed to a fund that helps save for a down payment for the Tenant/Buyer. In general, this monthly amount will be inflated and higher than the rent that is currently being paid, so that impacts the monthly budget. Granted, it’s a forced savings account, but even at $200 extra month, that’s a total of $2,400 for a year (roughly 1/2 an FHA deposit on a $137,000 purchase).
Risk #2 – Down Payment: Normal leases require at a minimum, 2 months for security deposit. Let’s assume that the monthly rent is $900 – that’s $1,800 total out of pocket for the lease. No problem you say? You would have to do that anyway? RIGHT, you would. What a Tenant/Buyer might not realize is that in addition, the Seller/Owner of the home will most likely want a non-refundable deposit from you to ensure that you follow through with the purchase. This could range from $5,000 up to however much the Seller/Owner feels is a reasonable amount to guarantee that the Tenant/Buyer won’t change their mind.
Risk #3 – Inspections & Other Costs: Before the lease begins, it will be important to know exactly what you’re getting in to, so a complete inspection of all mechanicals and the structure should be performed. That’s another $600-$1,400 depending on if an on-site well and septic system are involved. You will find out if there are any deal breakers, so this is all good, but it’s an additional expense.
During the course of the lease, as a Tenant/Buyer you could potentially have to maintain the property, fix anything that breaks, pay all utilities and have full insurance coverage on the home.
Risk #4 – Change of Heart: After a year in the home, what happens if things are discovered that just don’t thrill you? It’s “the grass is greener” syndrome. You’ve found another home that might be better and technically you don’t own this one yet, so maybe you can get out of the deal? What a headache! Between security deposit, non-refundable deposit, inspections and costs over the year, it could mean a loss of nearly $10k.
Owning a home can be wonderful and is something I’ve helped a lot of people do over the past 4 years. It sometimes takes a little more time and patience than preferred, but when it happens, it’s a great thing. Some of the most successful deals I’ve worked on involved some planning, consultation and creative financing. All with happy endings.
Sometimes it’s OK to Lease. Other times a Purchase can be perfect. Together they are not necessarily better.