What Are Lease-Purchase Options?

This summer my family faced a less than ideal housing situation: because of a job relocation, we had to sell our Memphis-area home, which we'd bought less than a year earlier.

When we purchased the house, we thought we were getting a stellar deal. The builder was trying to close out of the neighborhood, and we got the model home for much less than he had put into it.

But within about 10 months of buying, my husband was offered a fantastic job in Alabama. We needed to sell. And as with any relocation, it needed to be done quickly so we could get settled in a new home in our new town. We hired a fantastic Realtor who took tons of photos, showcased our home online, added visual video tours and marketed it like crazy. In the home’s first weekend on the market, we got an offer, but for much less than our already-low asking price. After gut-wrenching negotiations, we accepted a less-than-ideal offer, thinking we’d at least be done with the dual-city drama.

Soon we discovered, however, that the people who made the offer couldn’t get a loan. We were upset, but figured that we’d gotten that offer quickly; surely someone else would come along soon.

But they didn’t. We weren’t getting showings. It wasn’t the price -- we’d gone with a number well below market value. It wasn’t the house itself -- it was still gorgeous, staged nicely and in great condition. It was simply the depressed market. Our home was in a lovely little town on the outskirts of the Memphis metro area. But Memphis, despite having lots of affordable housing, was nonetheless suffering deeply from the foreclosure crisis. And while we were only about 15 minutes from downtown Memphis, at the time we were selling, gas prices were astronomical, which probably depressed our potential buying market.

After about two and a half months on a dead market, we asked our Realtor to add a lease-purchase option to our listing. Within a couple of weeks, we had buyers who were asking, in fact, for the lease-purchase option.

Lease-purchase: What is it?

In a lease-purchase arrangement, the buyer and seller enter into a contractual relationship where the buyer will lease the seller’s home for a predetermined amount of time, at the end of which, they will close on the house.

In some lease-purchase arrangements, the potential buyers are under no obligation to close on the house if they choose not to. In others, the buyers put down a deposit that, if they don’t close within the stated amount of time for any reason, they will forfeit to the sellers. Our arrangement is the latter situation.

We obviously weren’t thrilled we couldn’t close immediately, but the buyers offered us our full asking price and put down a good amount of earnest money as a deposit. And we have someone in our house right now covering our mortgage costs rather than having to shoulder the burden of paying for rent in a new town and carrying the note on the old house like a financial albatross around our necks.

Why would someone need a lease-purchase?

Buyers may find lease-purchase options attractive for a few reasons. They may love the house and want to buy it, but need to save more money for the down payment. They may not be able to get a loan until they sell a previous home. They may have iffy credit or shaky financials they hope to get in ship shape before the closing date. Or they may have qualified for a loan at one time, but not under the stricter requirements in today’s market.

For sellers, it’s somewhat more complicated. “It’s important to ascertain what the buyer’s reasons are for needing a lease-purchase, and that those things can be solved during the period of the lease,” says Bill Golden, a Realtor with Re/Max Metro Atlanta Cityside. Even if your buyer has some financial issues they want to get in order before closing, it’s still important to make sure they’re qualified to buy your house. Getting a letter from a reputable lender stating that your buyers are financially able to buy is a must, Golden says.

My Realtor warned us that a great number of lease-purchase agreements don’t end up closing. But then again, many do. For Chicago-area resident Ljiljana Losich who acutely wants to own her home, the lease-purchase option was her only route during this time of trepidation for banks.

Losich says she is satisfied and glad to have had the lease-purchase option, but that she won’t be truly happy until the home is hers. “I cannot wait to see my husband’s and my name on that mortgage loan and start life on the right track,” she says, adding that the waiting is weighing on her emotionally, but that she accepts that they need to wait out the financial storm currently raging in the mortgage markets.

The pros and cons of lease-purchase agreements

Despite the risks involved in entering into a lease-purchase agreement for the seller, getting the house off the market and having some financial certainty about who will be paying your mortgage next month can be very compelling motivation. That was the case for us: My husband’s company was paying for temporary housing for our entire family in our new town, but it was for a limited time period. We needed to find someone to pay our mortgage so we could at least find a rental property to live in until our house closed. “A seller can look at it as 'a bird in the hand’ as opposed to waiting around for just the right buyer who would be willing to close sooner,” Golden says.

In the past, lease-purchase agreements gave the buyer an opportunity to “lock in” a price on the home, expecting the value of the property might rise by the time they closed. Of course, in today’s market, it could work out either way. For some sellers, a lease-purchase buyer’s abandonment of the deal could work out to tens of thousands of dollars lost because of the declining market. Of course, in other areas, lease-purchase buyers will come out on the winning end, because home prices are still rising.

Words of wisdom for lease-purchase deals

One of the most important things to remember is to make sure you and your Realtor go over the lease-purchase contract with a fine tooth comb in hand and Murphy’s Law in mind. While you may be hoping for the best, preparing for the worst makes good financial (and legal) sense. Our Realtor found a couple of clauses in the agreement that contradicted each other, and she struck those. She also asked the buyers to raise their non-refundable deposit by 50 percent to better protect us in case the deal doesn’t close.

If you’re desperate to get someone in your home immediately, offering a lease-purchase arrangement can make sense, especially now, when people who would have been prime borrowers in the past are now having trouble getting a loan. “I’ve been in the business for 22 years, and I had not done a lease purchase since my first year in the business until two came along [recently],” Golden says. “Sellers are becoming more open to different options for selling their homes, and buyers are looking into more creative ways to buy homes. The market is quite different than I’ve ever seen it, and I think it makes sense to look at all your options.”

As for us, our lease-purchase hasn’t closed yet. It’s been about five months since we entered into it, and we’re of course getting antsy. But not as antsy as we would be if we were scrambling to pay rent and our mortgage each month. It isn’t an ideal situation, but it’s definitely not the worst, either. For now, we’re just accepting that this is the new housing market, and we’re hoping that in a few months, our Memphis-area house will be legally in someone else’s capable hands.