A lease purchase is typically a lease with an agreement to purchase at some point in the future. They are frrequently also referred to as lease options. One or two years in the future for the purchase is typical. There is normally some consideration paid for the option to purchase in the future.
In most cases, a lease purchase is utilized because the buyer is not in an immediate position to finance a home, and they would like to establish an option to buy at some future date. In the current economy, there are many people who don’t qualify for financing, but would like to be homeowners. A lease purchase can be the perfect tool to enable a potential buyer to move into a home while building his or her financial profile to purchase the property. With qualifying for conventional financing harder than ever, a lease purchase can be a simple and effective way to sell your property and help the future homeowner fulfill the American dream of owning a home.
As an investor, structuring a lease purchase on your investment property can be a winning strategy for all concerned.
There are five reasons why lease purchases are a viable option for investors and potential home owners:
1.) A lease purchase can be a great short-term exit strategy. As many investors have discovered, flipping a property in the current real estate environment can be difficult and costly. Residential inventory levels remain high and with the flood of foreclosures continuing to hit the market, the competition is overwhelming. While a lease purchase probably won’t close in 6 months like a potential retail flip, there is a 12-24 months window to sell the property at better retail pricing. It is best to structure a lease purchase such that it provides positive cash flow during the lease term.
2.) Tenants tend to take better care of your property in a lease purchase. Most tenants look upon the home they occupy as essentially their own (or soon to be). It just makes sense that a tenant takes better care of the property when they intend to own it. One of the most frustrating aspects of being a landlord is the lack of care and respect given to a rental property by some tenants. Most investors that work the lease purchase area experience that most lease purchasers have a slightly better “homeowner” mindset and tend to treat the property with a little more care. They also frequently make improvements such as paint, flooring and countertops. This is especially true if you structure the lease to provide that the tenant (future home owner) makes minor repairs.
3.) It’s easier to avoid real estate commissions with a lease purchase. Unlike a retail flip, most properties for lease purchase are not placed in the MLS. The best approach is to place lease purchase properties on the internet such as Craigslist, Facebook and Twitter. Signs also work well but they are subject to local zoning and ordinances and almost always require a permit. There are no commissions paid when the property is “sold” because it was built into the lease agreement.
4.) It is better to receive a down payment than a security deposit. Unlike a renter, a lease purchaser actually puts up a non-refundable down payment on the property that is not returned if the purchase does not happen. To be clear, the down payment is credited to the tenant if they follow through with the purchase. However, if the buy does not happen, the initial option money is forfeited. Even if you may be skeptical about a tenant’s ability to make the purchase within the term of the lease, you may still execute the contract because you am comfortable with the amount of option money received up front (which is typically much more than a security deposit). In this scenario, the tenant will be that much more motivated to get financing within the term of the lease.
5.) A lease purchase can be a true “win-win” transaction for both the investor and the buyer. When structured fairly, a lease purchase can be a great path to homeownership for your tenant. The ability to lock in a purchase price (at today’s lower prices) and benefit from the monthly rent credit makes a lease purchase the next best thing to a conventional mortgage for the tenant. At the end of the day, if the tenant buys the home, the investor can feel good about making a great return on his or her investment, while at the same time helping the tenant achieve their goal of homeownership.