As with most things the correct answer is ‘it depends’. If you’re not sure what a lease purchase deal looks like it is pretty simple. Someone with credit challenges that has some cash to put down signs an agreement to lease the house for a while (usually a year), pays a down payment to be applied to the purchase of the house and agrees to buy it at the end of the lease. The assumption is that the credit issues will be resolved in a year and they will qualify for the purchase money mortgage.
If you are the seller and you really need to sell I would not recommend doing a lease purchase. It has almost no chance of actually selling the house. If you are a buyer that really wants to buy a house I would say that a lease purchase is not for you. I’m not opposed to lease purchase deals but I don’t see the ‘purchase’ part of the deal actually happening most of the time.
I think there are a couple of practical barriers to the deal working a one big emotional one. Most of the time buyers that have credit issues today will have credit issues a year from now. It is not always the case but it happens that way about half the time. Home values have been falling and while I think they will eventually start to appreciate again it might take a while. That means the agreed to price on a lease purchase deal will likely not make the appraisal test so the deal will have to be redone to sell in a year. Those two things are pretty big but I don’t think it is the real reason most deals fail.
Buyers buy a house emotionally and justify it rationally. In that truth is the reality that time is not your friend in a lease purchase. Here is the progression in a lease purchase:
- Buyer has credit issues and looks for a lease purchase
- There are not many to choose from so they don’t really find what they want but rather what they will accept.
- Buyer puts 2-3% down and moves in under a lease agreement
- Buyer gets some time in the house and discovers some things they don’t like. That noisy neighbor or the bathroom that is too small.
- If they can fix the credit issues they begin to see that they have more choices and perhaps their dream home is not the one they are living in.
- Buyer finds a better house and is willing to forfeit the down payment to get the house they really want
I see that play out in many deals that fall apart.
So why would I even consider a lease purchase? If you are a landlord who is willing to sell the house but don’t have to and you want a quality tenant then a lease purchase is a good idea. You get a significant security deposit and earnest money deposit to cover the house during the lease and the buyer / tenant feels like they have an interest in keeping the house in good repair. It works for the sellers advantage but seldom does the buyer win. You have to be willing to sell the house in the outside chance that the buyer will actually purchase the house but that is the only downside to the deal.
There is more to consider in any deal like this and if you are thinking about options to selling please call me to talk. I love what I do and one of my favorite things is to talk about the details. Call me at 678-231-1578 if I can help.
Thanks for listening,
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