Is a lease option the way to go when selling your Orlando Florida home?

This is an update from an article I wrote several years ago. We just helped a buyer close a lease option transaction last week, so I know these deals are happening. With all the people that have gone through short sales and foreclosures in recent years, I thought it would be appropriate to address this subject again.

These deals go by many names in the industry, lease purchase, lease option, lease with option to buy, rent to own. They are all similar creatures. I want to try and explain these a little bit at least from my own experience with them in Orlando Florida. I am not a lawyer, nor do I play one on TV, but this is how I like to do these. These transactions are yet one more strategy you can have in your real estate toolbelt.

I like to call these arrangements a "lease purchase" and nothing else. A lease purchase basically means that a tenant is renting the property and ultimately will purchase the property by the end of the lease term.

I used to like to give tenants a "lease option" or a "lease with option to buy" which gives the tenant the option not to purchase the property if they don't want to, but the end result is either the tenant is going to be able to get financing or they aren't, so why give them an option? My goal is to sell them the property, not have them rent it and back out. Also, I don't like the term "rent to own." When I used this language in my advertising, people started thinking about how they rent a television set or furniture, no money down and make payments for years until it is finally paid off. Instead I want to get them thinking of how quickly they can refinance and actually own the property.

The first thing I do once I have an applicant that wants to lease purchase a property is to do a credit check. I have my mortgage broker pull their credit and see if maybe just maybe we can get this person in to a mortgage right now. If so, then we don't even have to bother with the lease purchase. We just do a regular sale & purchase right then and there. More often than not the applicant cannot get a mortgage right now.

Then the next question is: Is there any realistic chance of them getting a mortgage within the next 1-2 years? After all, why gets someone's hopes up if their financial and credit situation is bleak at best?

If the property is one I have listed for a 3rd party seller, I have that seller provide me an application or let them use the one off of our website. Then I have the seller do whatever background checks they need to do. I help guide them, but it is ultimately their decision on whether or not to accept the applicant.

Now if the property is one in my own portfolio, I have a system in place for screening. I already have a lease purchase application posted on my company's website, and I have the applicant fill it out. My purpose with the background check is two-fold. (1) to verify if these people have any chance at all of ever buying the house, and (2) to make sure that I really want these people as a tenant for the next year. If they have acceptable credit and income with just a few dings, they pass #1. For #2 I screen just like I would a regular old tenant, I check for evictions, criminal, rental history, income history, and overall general character. Of course the more money they have to give me upfront the more likely I am to be lenient on both #1 and #2.

Typically the more money people have to give you upfront, the better chance they have of closing and not walking away at the end. However, I still have had people with fairly good sized deposits that ended up not closing. Several years ago at the height of the market boom, I had someone give me $20,000 upfront and a year later they walked away from the deal. (I did give them some of their money back because I just felt really bad for them.)

As far as structuring the deal goes, I use a standard Realtor purchase & sale contract, a pre-occupancy addendum, and a lease agreement. Basically there are 2 separate transactions. 1 agreement is the purchase & sale contract and 2 is the lease. I want the applicant to have 2 distinct relationships with me. 1 relationship as a buyer and the other as a tenant. That way if for some reason I have to evict this person, I can do it under the lease and not be forced to do some sort of foreclosure or ejectment proceeding. Florida evictions can typically be done in a few weeks whereas foreclosures can take a year or more. By keeping the 2 agreements separate, this makes the parties' rights clearer than if it was one lumped together agreement. It would be very difficult for a judge to reject the standard contract and call it a mortgage, but it would be easier for them to do it if you used some real estate gurus forms.

I also split the deposit money they give me into 2 groups. The bigger chunk is an earnest money deposit under the contract. This money is non-refundable and I get to pocket it and do what I want with it right away. The second smaller amount is the security deposit under the lease. This money is placed in an account as required by the Florida landlord/tenant act. This way even if the person does not end up buying, at least they get something back if they move out in an orderly fashion.

Some people like to let the buyer have a portion of the monthly payment go towards the deposit. To sort of add up during the time of the agreement. Personally I prefer not to do this, but if the buyer insists I will allow it as long as they are paying above market rent and give me a good-sized upfront deposit.

How much do I ask for the upfront deposit? I learned years ago that it is best to be vague about this. Normally when people ask me, I tell them we standardly ask for 5% of the purchase price as a down payment, but if they do not have that much we are willing to work with anyone who is interested. You definitely need to be much more liberal right now when the market is slow, so if they try to nail me down on a bare minimum I will give them a minimum figure of a few thousand dollars.

Regarding the term of the agreement, I don't like to write these agreements for more than 12 months. As most people know from this latest roller coaster market we have had, prices and market conditions can change drastically in a short period of time. If at the end of a year, the people need an extension I am willing to sit down with them and reasonably re-evaluate the price and terms of the agreement. I did have one couple do this with me for 3 years by paying me a $500 extension fee each year.

The main thing with all this is to be flexible. In a buyer's market, anything you can advertise to make your property stand out above the others is a good thing. If anybody has specific questions on lease purchase, feel free to ask.