Here in beautiful Central Louisiana, we are seeing an influx of people looking for a lease purchase arrangement. Why? Here are a few reasons:
- Buyers are relocating from areas where the market is upside down. They've had to short sale their homes, so can't purchase for a minimum of two years. However, they are accustomed to being owners rather than renters.
- Divorce places one or both former partners in a financial situation in which they cannot presently buy. However, once financial recovery from the divorce occurs, they are ready. Again, these people are accustomed to being owners rather than renters.
- With loan restrictions and resulting higher credit score requirements in place, some potential buyers are not quite where they need to be--not too far away, just not quite there yet.
- Business reverses with the current economic conditions have left them in a position of recovery, but they don't want to throw the money away in rent.
What are the advantages to you, the seller, in agreeing to a lease purchase? It's not for everyone. However, if you need to move on to a new location, but your house has not sold, this could be a "bird in the hand" for you. In addition, those who are selling an inherited property or a property that is paid off would be in a good position for this option, particularly if the property has been on the market for a while.
How does it work?
- To protect both parties, it is best to write and negotiate an Agreement to Purchase and Sell. Although an Act of Sale is farther into the future than the norm, it is still a legally binding contract.
- A substantial non-refundable deposit should be required that will be held by the seller. In this way, there is no misunderstanding, with the broker required to distribute funds based upon the rules of the state real estate commission. At Act of Sale, however, this deposit will be applied to the purchase price.
- A home inspection should be completed and all repairs negotiated prior to occupancy. Once occupancy occurs, no further repairs will be completed by the seller. As with any home owner, the buyer will be responsible for any and all repairs after occupancy.
- An early occupancy agreement should accompany the Agreement to Purchase and Sell. It should spell out in detail the responsibilities of both parties. For example, the seller is responsible for maintaining taxes and insurance on the dwelling, while the buyer is responsible for insurance on the contents and day-to-day maintenance, including landscaping and mowing. Amount of monthly payment should be stipulated as well as how much of this amount will apply toward purchase price. If a mortgage is in effect for the seller, naturally only the amount of principal can apply less taxes and insurance. Monthly payments are typically sent directly to the seller.
- As the time for Act of Sale approaches, the buyer will need to make good faith application for financing. If unable to obtain, an extension can be requested, but there is no guarantee that the seller will approve it. The deposit and monthly payments are forfeited by the buyer.
- What happens if the market has further declined and the property does not appraise? This is typically a reason for withdrawal from contract if the seller refuses to lower the purchase price. However, the seller is holding the deposit, and it has been declared non-refundable. This detail should be discussed on the front end, and the REALTOR® should do a market analysis to determine if the house is currently listed AT market value rather than above.
There are some risks taken by both parties in such an arrangement, but if done correctly, it can be a win-win for all parties. And, yes, the REALTORs® who participate in negotiating such an arrangement are paid at Act of Sale.
While we all prefer a straight "put it on the market and get it sold" arrangement, the current economic situation in various parts of the country are making this difficult and in upside down markets, impossible. That's when it may be time for the seller and his/her REALTOR to think outside the box.
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