Lease Options – Investor, Tenant, Agent: Win/Win/Win?

Within the segment of consumers who want to be homeowners, there’s a subset who cannot qualify for a loan, and will therefore not be a homeowner until they can. Typically, these folks have a credit profile that precludes them from qualifying for a loan that can work within the parameters of their income and debt. In the past, the only alternative to buying was to continue to rent while working to fix credit issues, and decrease debt (and if income happened to increase along the way – a bonus).

Today, this segment of folks have the ‘Rent to Own’ option available to them. Popular with conservative investors who want the advantages of appreciating investment property, but without the hassles of rental income, the Lease-Option is an arrangement whereby an investor leases a property to a tenant, who is also extended an option to purchase the property within a certain time frame (two years is typical in the Puget Sound market). For an investor, the Lease-Option playbook is extensive – there are multiple approaches to this type of investment.

However, a program that seems to be growing in popularity is the ‘Pick Your House’ program that agents offer potential homeowners. The scenario the agent shares with the tenant is that they can pick the house in which they want to live (as long as the price of the home – rather, the monthly costs associated with the home – falls within the tenant’s budget). The agent then finds an investor to purchase the property. The rent is structured to cover all the investor’s monthly costs (PITI). Additionally, there is typically an option fee that the tenant pays to the investor up front. I’ve seen it fall into the 1% of property market value. Though non-refundable, this fee is applied as a credit toward the purchase price should the tenant exercise the option. Sometimes, a small portion of the monthly rent is applied toward the purchase as a credit as well. The option price is calculated under certain assumptions (such as 8% annual appreciation), and the price therefore might be set at 10% over current market value at the end of two years. This allows the tenant to capture some equity upon exercise, assuming appreciation is higher. Additionally, the tenant is contractually obligated to manage small repairs (where a renter would just call the landlord), with the investor taking care of larger repairs (in excess of some agreed upon dollar amount).

It’s a good way for a potential home buyer to get his foot in the door – as a matter of law, they have an interest in the property with the option (this can and should be recorded with the county to protect the tenant’s interest).

The option can be lost if the tenant defaults on the terms of the lease, or if he chooses not to exercise the option. Here’s the kicker – I’ve read/heard that the default rate for lease option tenants hovers near 70%. The biggest reason seems to be that bad habits are hard to break. If the tenant is counseled correctly, the lease period is an opportunity to repair credit, pay off debt, and position the tenant to qualify for a loan needed to exercise the option. The reality is that tenants don’t pay their rent, continue to over-extend themselves, or decide upon a different direction with their life that requires a move.

Unscrupulous investors and scammers will take advantage of these tenants and pull the option from underneath them for the smallest deviation from the lease terms. In fact, Lease Options were outlawed in Texas due to the scams. However, if the investor enters the transaction and deals with tenants fairly, it’s a win/win for the investor and the tenant/optionee.

I am wondering about the ethics of an agent working with a tenant to pick a house, then bringing in an investor to purchase it. At first glance, it seems that there is a clear conflict of interest. Isn’t there? Maybe not. The tenant is informed and gives consent to the process from the start. The agent is there to help find the home, but the investor is actually purchasing it. However, since an option – and therefore an interest in the property – is involved, does this create a technical conflict of interest? The investor is more concerned with the profile of the tenant, and with making sure that the numbers work for the transaction. The tenant is more like a client to the agent. They are driving around with the agent, evaluating neighborhoods, and picking the home, subject to investor approval.

Are ‘Pick your Own’ Lease Option programs a win/win/win for the tenant (who may successfully purchase the home by exercising the option), the investor (who gets a fixed return assuming an exercised option) and the agent (who gets the commission from the transaction)? A fourth party, adding another ‘win’, is the mortgage broker who may very well finance the deal for the investor, and create a relationship with the tenant that leads to financing the exercise of the option down the road.

Full disclosure – as an investor, I have purchased four properties with tenants who had options to purchase. However, none of them were acquired in the ‘pick your own’ method discussed above. I acquired the contracts by paying an assignment fee.

52 thoughts on “Lease Options – Investor, Tenant, Agent: Win/Win/Win?

  1. Okay, silly question here:

    How would this be handled at closing? The investor is relying on the lease. The tennant is relying on the investor, but is likely not present at the closing (or are they). The way I see it, and this might be overly pessimistic, is the tennant could not end up signing the lease after closing for just about any reason and the investor is stuck with the property.

    To the attorneys out there: is it possible for the tennant to sign the lease _prior_ to the closing? If so, wouldn’t that look better for financing for the investor (typically accounting for 75% of rent as income)? If this is the case, this would seem to be the perfect solution for investors (assuming the tennant doesn’t immediately default…).

  2. Just to clarify for readers, when Eric says that the Lease Option is recorded at the county, it really is giving notice that there is a lease option/interest in the property, not a transfer in ownership, yet. You can record most anything at the county for a fee. For example, if Eric thinks that his neighbors pink paint job is ugly, he can record his dismay.

    Some people record the lease options, some never do. One benefit of recording the lease option is that it makes it more difficult for the owner to sell the home to someone else, undercutting the tennant, per se. When a title search is done, the recording should show up.

    One item to note is that at the time the tennant excercises the option (buying the house), some lenders may treat the transaction as a refinance vs. as a purchase which may be less costly to the tennant who is becoming the owner. Consult your lenders for this possibility.

    Regarding Tom’s questions…. Tennants could sign a lease with the investor , subject to the investor actually aquiring title. So, yes, it could be done prior to the investor closing on the home. To the question of “it”looking better for the investor’s lender? Probably so. If you have a lease in hand, it is beneficial—but that’s really a lending issue.

    Hope this is helpful. The above comments (originating in Washington State) are general in nature and every situation is different. For Washington State specific questions, consult your attorney, such as contributors Craig Blackman or Russ Cofano.

    Lynlee(LPO-DEO) & Tim
    Legacy Escrow Service, Inc.

  3. Eric,

    Does the price the tenant will evenually pay have a built in appreciation factor? i.e. Investor buys it for $300,000 and lease purchase price is $350,000? What happens if the market goes down by the end of the period? Is that covered in the agreement in any way?

    Is there an in between firm that collects the rent and pays the mortgage, so the tenant is assured that the owner won’t default and go into foreclosure, during the lease period?

  4. Ardell:

    Yes. For these types of programs, the investor return is typically 10% over two years. The assumption is that the property will appreciate at least 5% per year (actually, slightly less). If the market tanks, then the tenant can choose not to exercise his option, and walk away, or continue renting if they wish.

    As for you second question, we receive payments directly from the tenants for our lease options. We take those funds and immediately pay the PITI. I suppose there is the risk that the tenant would lose his option if the property went into foreclosure, but given that the debt maintenance is covered (as well as tax and insurance), it would not be in the investor’s best interest, especially since they most likely have a 10-20% down payment on the property they would risk losing.

    However, this is probably a good question to throw out to the legal eagles.

  5. The reason I ask Eric, is that when I first moved to Seattle I met someone who got scammed very badly. The market had gone up, the owner never expected the tenant to make their payments, but they did, and the owner didn’t want them to get the house at the, now low agreed upon price. The market had moved up at a higher rate than he predicted in the original agreement.

    They forced it into foreclosure and the “new owner”, who was the old owner’s cousin or other, evicted the “tenants”. Of course after I freaked out at the foreclosure attorney, who knew nothing, and was as freaked out as I was when he heard the story and I faxed him some proofs of the scam, I left it in the hands of a couple of attorneys. Don’t know what happened as I did all that was in my power.

    It was a ring of ESL people, the owner, tenant, agent everyone spoke the same, but different lanuguage. Quite a mess and a very sad story.

    From the tenant/future owner perspective, I would not recommend doing one of these without a third part collection company who collects the rent and pays the mortgage.

    Eric, It seems to me that fair market rent does not equal mortgage payment plus taxes and insurance on 10% or even 20% down. Is the monthly payment the tenant pays over fair market rental value? Give me a for instance.

  6. Ardell, may I chime in?

    Great critical thinking! Glad you brought up your question. There is upside and downside to this arrangement for both parties. In a softening market, an astute tennant may elect to walk away at the end of the lease because the market may or may not have rewarded the tennant with equity higher than the initial agreed upon price. Or, they parties could re-negotiate. It might be a drag for the tennant to have to move again, never mind losing out on any option money deposit or a portion of the monthly payment that may go towards reducing the agreed upon sales price. All depends.

    You may see an uptick in interest in this type of deal by investors who need to cover existing loan payments and need to raise cash via option money. The downside, like Eric suggests, is that many borrowers who can purchase, already have in the traditional sense. So, tennants that cannot purchase for credit or other reasons, may be the type that investors attract. It may not be the best marraige. But then again, pretty much anyone breathing can get a loan these days.

  7. Tim,

    The one example, which is the one I gave, is people who have just moved to this Country and have no established credit here, but are good-hard working people. It was a crime and a shame for them to get caught up in this scam. It took me many, many hours to figure out what happened, because they didn’t speak English, but I just had a wierd feeling that something wasn’t right.

    Long story, of course, and I just touched on the details. But sometimes I think God just puts me in the right place at the right time to set things on a right course. Happens at least twice a year. I just look up and say, OK the last one was easy…this one’s for YOU 🙂

    The other odd one was when I sold the house of the “homeless” lady down in the CD. That was one I won’t forget soon.

  8. Ardell.

    There are lots of scam artists out there. I’m not one of them. When I deal with Lease Options, I deal with people. I’ve had tenants late with payments. The scammers would immediately take away the option.

    There are scammers in anything involving money…including agents! But there are lots of good investors who like the idea of a win/win that comes with Lease Options.

    As for rent, if fair market value rent is $1450, then for my lease options, I can only get as much as maybe $1550. The market still dictates the rent that can be collected for the most part. However, if the investor is a scammer, I could see where they could promise the moon in exchange for a even higher rent.

  9. It’s interesting that no one has brought up the role of the agent in this transaction. That was the point to my post. Is there an ethical issue at stake here when the agent works with the tenant to choose the property, but then legally represents the investor in the transaction.

  10. Eric,

    It’s not about scammers. Anyone who is in a financial bind could divert the rent checks to another pressing need. Heck someone could lose their job and need that rent money to eat, and not pay the mortgage. That’s not a scammer, that’s a human being.

    The tenant should NEVER get into one of these things without a third party payee that collects the rent and pays the mortgage.

    And no owner wants to let a property go at $350,000 if it is worth $450,000. Their original intention was to convery at 5% appreciation per year, but if the property goes up 20% per year, you don’t have to be a scammer for that to hurt too much.

    As to the agent…in my “bad example” the agent collected the rents that didn’t funnel properly and caused the foreclosure, and then skipped town. Last I heard the tenants brothers were camped out at the agent’s mother’s funeral trying to get a crack at him.

  11. Eric,

    I followed the link and do not see in that article that lease purchase contracts were actually “outlawed” anywhere. Just some tighter consumer protections.

    As to your question regarding the ethics of the agent, in essence you have two buyers. The ones in the car who are picking the house and the one sitting at home who is paying for it intitially. Somewhat like kids who are buying their first home and their parents are going to “lend” them the money to do so. We see that all the time. The kids are with you picking out “their” house, the parents swoop in at the end, with the money and final approval.

    If you find that their interests are not one in the same, then you may have an ethics issue. But we have that sometimes with a husband and wife who don’t agree 🙂 Having two or more clients buying together is nothing new, and I don’t see any ethics issues as long as their objectives are the same.

  12. Well, I would do a strike out in your blog entry there, because spreading mis-information is not a good thing. Maybe the link portion should say something like “Texas regulators are cracking down on abuses”, or “Texas regulators are offering a higher level of consumer protections”. It clearly should not stand as is “Lease Options outlawed inTexas” I don’t think it is within the power of government to “outlaw” lease purchase options.

    Outlawed is a strong word. Agency was “outlawed” in Oklahoma and Dual Agency was “outlawed” in Florida, and net listings are “outlawed” in several states, but those are agent licensing powers. Outlawing the ability of consumers is almost never. So show that as a strike out.

  13. Eric,

    Are you anonymous, or is it just my not knowing how to get to your profile for full name and email address? I would have emailed you the above comment offsite, but do we know who you are? Isn’t it odd to have a contributor be anonymous? You look like one of these “Secret Agents”. Dustin, Do you know who Eric is or is he completely anonymous?

  14. You’re right. It was a bit of hyperbole, and was meant to represent the chilling effect the law had on investors. I’ll happily edit my post to correct this.

    BTW, Dustin knows who I am, but if he told you, I’d have to kill him. 😉

  15. Well, some people think they can take what “we” say “To The Bank”. And from what I’ve heard, Texas ain’t the place where you want to misquote something…they may come after you with guns a blazin’ 🙂

  16. Well there’s really only one reasonable guess of who you might be. Agents aren’t all that hard to “find”, so don’t be blaming Dustin that I’ve “guessed” it 😉

  17. Mine’s easier. I’m the only ARDELL in NWMLS…first name searcheable. Dustin says I’m ditzy for liking that I’m first name searcheable on Google and MSN. I get excited over a new nailpolish too. Some people are easy to please…

  18. I am actually thinking of doing a rent to own as a tenant and was searching the web looking for the pitfalls. From a tenant point of view what should I look for to avoid be scammed? Just what are the laws regulating this process?

  19. Hi Stephen,

    Why would you do a lease purchase vs. a straight purchase? If it is because of credit issues, the bigges pitfall is that many still can’t get a loan at the end of the period, and lose a lot. Also the price of the property is always higher in a lease purchase than an outright purchase. So you wouldn’t do it unless you couldn’t purchase any other way.

  20. I agree with Ardell’s first reaon; however, regarding her second reason, in my lease options (and the ones offered on ‘pick your own’ programs with which I’m familar), the tenant’s option price is under the projected market value. If a home is bought today by the investor, the tenant will have the option to purchase it with a 10% markup after two years. In a market that has been appreciating at an annual rate in the double digits, the tenant/purchaser ends up ahead and with equity built in.

    When I buy the property wholesale, there’s more upside for me (since it’s been bought well below market value), but even then, the tenant has even more equity built into the purchase price.

    This is from my experience as an investor dealing with lease options. Perhaps I’m more ethical and fair than what Ardell has seen. At the end of the day, the goal for me as an investor is to have forecastable returns (somewhat like the airlines hedging their fuel purchase.

  21. Eric,

    My experience comes from the seller’s side of the fence. “When all else fails”…lease purchase. When a seller can’t sell or can’t get the price he wants, he opens up the option of lease purchase to achieve his goal of selling the property, historically speaking.

    From a buyer’s standpoint, finding financing, even at a ridiculous rate, is usually better than doing a lease purchase. A higher rate with the ability to refinance after 12 months, usually gives the buyer more options with regard to housing choices, than only homes where sellers are willing to accept the lease purchase arrangement.

    The current market mixes “lease purchase” with “option to buy”. Historically, “lease purchase “is at current value…”option to buy” is at future value.

    A true lease puchase is at current value, with no payment up front and a higher than fair market rental value for the monthly. The difference between fair market rent (say $1,000) and the lease puchase monthly (say $1,500) is applied to the eventual purchase price and costs. The $500 difference is set aside and counted as “buyer’s funds” at time of close or forfeited, if the buyer cannot close on the specified date.

    An option to purchase is an up front amount of say $10,000. The tenant pays fair market rent and reserves the right to exercise the option at a specified price within a certain timeframe, of forfeit the up front option monies.

    The current and relatively new model charges more for the house today, than what it is worth today, an up front fee of some kind, and also charges a higher monthly than fair market rent. The buyer is quite limited to housing choices to only those willing to consider such an arrangement.

    So the buyer gets hit on 1) grossly limited choice of housing 2) often an up front payment 3) usually a monthly payment higher than fair market rent and 4) forfeiture of any up front fees.

    It will be very interesting to see how these new arrangements pan out for both parties, come judgment day.

    Eric, how did you get these homes at rock bottom bargain prices during a hot seller’s market? Were they fixers that you fixed up? Houses on busy roads? Or were you just very lucky four times in a row? Were there any up front fees paid by the tenant/buyer?

  22. As an investor, I don’t work with Lease Purchase contracts. As you correctly state, these make sense for buyers who have trouble selling their homes, or what to offer terms to get their price. They are very limiting to buyers since it is a binding purchase contract, not an option.

    In my experience, tenants have lousy credit, and they like the lease option contracts because even though they might be able to get a subprime loan, most all of them require a 2-3 prepayment penalty, effectively barring them from refinancing within a year even if they improve their credit.

    With a two year option, the tenant has ample time on improving their credit scores (which will allow them better rates when the they exercise the option in two years). Additionally, the option price offered will include some built in equity based on certain appreciation assumptions.

    They do pay higher than market rates, which covers my costs, but I’ve got 20% down, and am getting a great rate (due to my low risk, high credit profile). If they bought it themselves, their payments would even be higher, since the tenant would have little/no money down, and be paying a much higher rate. Additionally, two years of tracked/recorded on time payments ‘season’ their profile, and the lender likes to have proof of a buyer who pays on time.

    I’ve gotten all my lease options on the wholesale market, on assignment from another buyer who found these properties usually from sellers in pre-foreclosure.

    Additionally, with the retail lease option programs, the tenant/buyer isn’t grossly limited to just the desperate seller. They can pick their house based on their ability to meet the monthly costs of the investor, and the option price still leaves some equity on the table (assuming convservative appreciation rates).

    As for fees, like I mentioned, I’ve typically seen $3500 – $5000 up front option payments. In the case of one of my properties, I agreed to split the $3500 payment into an upfront of $2500, with the additional $1000 due in November.

    However, as I also pointed out, I don’t like the retail lease option programs. It’s too much risk for the investor, in my opinion. If the tenant walks in the first year, the investor is stuck with a property that will cost too much to sell, given transaction costs of the sale.

  23. I am not an attorney. I think there is a misunderstanding about what an option is and isn’t. An option is not an interest in real property. An option is a purchase of a length of time for an agreed to price. Exercising the option results in executing terms mutually agreed to between the optioner and the optionee at the time the option was purchased. A lease option in real estate is the right of the optionee/buyer to exercise the option to execute a mutually agreed to real estate sales contract during a set length of time. Exercising the option to execute the contract can create the interest in real property. If the option length is two years and the option is not exercised, then there is no interest in real property. The optionee/buyer failed to execute all terms of the contract within the option period. The mutually agreed to real estate sales contract is dead.

    I think it may not be wise for a portion of the optionee/lessee’s rent to be credited toward the purchase of the property. The credit toward the purchase can be argued to be an interest in the property. I think this is the case in the State of WA. It is similar to two non married people living together when only one individual owns the real property. Both contribute to the capital mainteance of the real property. When they split up both individuals have an intereset in the property. If the optionee/lessee stops paying rent according to the executed lease agreement, then an eviction may be very hard to accomplish as the optionee/lessee is a part owner of the property. It may be better to have the optionee/lessee save the proposed credited amount as a down payment in the lessee’s savings account. Without executing the option during the lease term all lessee payments are for rent and create no interest in the property. This may increase the liklihood the option is not excercised as optionee may continue poor savings and credit habits.

    Cheers,
    Michael P. Lindekugel
    Financial Analyst
    RE/MAX Commercial
    Team Reba – RE/MAX Metro Realty, Inc

  24. Hello,
    My name is Nathan Reyes and I am a 23 year old engineer very much trying to get into real-estate investing. Right now I am in the process of constructing a lease with the option to buy from my grandparents. I just graduated college and my credit is not bad, but just not developed. I chose the lease-option b/c they are first willing to offer a low price for the property to family and they are willing to wait a while to finish paying off their home equity loan. My plan is to lease this property to a tenant to establish some equity, and then either refinance at the end of the four year term or excercise my option and buy the property outright when I have some equity established. My only hinderance now is that I am not familiar with the process get the lease option agreement through.
    I am thinking that I do not need title insurance and thus would not need to go through a title company until I excercise my option to buy. Can I just go through an real-estate attorney to review my forms (obtained through Carleton Sheets program), or is there something I am missing.
    Also, is the option consideration down payment a necessity, or if we agree that no down payment is necessary, then is this actually legal. I would appreciate anyone’s advice, as I have never actually purchased a property before. I hope the learning curve is not too high, but I am confident that the work will pay off.

  25. I am currently living in Amarillo, TX….but my grandparent’s property is located in Robstown, TX near Corpus Christi. The thing is that they have already moved into the Dallas/Ft. Worth area and I am trying to decide if I need to go through an attorney near the actual property, or if I can go through the Dallas area where my gradparents currently live. I would prefer finding one in Dallas so they it is more convenient for the grandparents.

    Also, do conventional lease option contracts allow the right to sublease or sell the contract? Thanks for your help Ardell.
    Nathan

  26. I agree with making it convenient for the grandparents. I don’t think it would be appropriate for you to sell or assign a contract given you by your grandparents, without their specific approval at the time. You could be sticking them with a problem, when they were trying to do you a favor. (That’s the Mom in me talking, not my “professional” opinion) But suggest that to the attorney, so he can feel out your grandparents thoughts on that, to avoid any friction between you and your grandparents. If the grandparents get mad you can always say it was the attoney’s idea 🙂

    I can tell you if my Mom were giving my daughter a lease option opportunity on a property she owned, and she brought up selling the lease option the day they were signing it…my Mom would tear it up on the spot and leave the room and you don’t want to know the rest 🙂

    “Conventional lease option contracts”…you know, I haven’t done one in 16 years, so I don’t think there’s much “conventional” about them. In fact, ask the attorney how many he has done and try to find an attorney with a lot of experience with them. Try to get an estimate of the cost involved at the same time. I don’t know anyone in Texas…have only been to Houston’s airport on my way to somewhere else.

  27. Ardell,
    Thanks for your honesty. I really do not plan on selling or assigning the contract…I was just curious about the technicalities so that I am aware of it in the future if I become comfortable with lease options.

    But I really do find it surprising that lease options are not more typically used in real-estate…as I was having trouble finding attorneys who deal with them. I heard somewhere that some investors were getting into trouble by taking advantage of people this way…but I really think it can be a win-win for both parties (my grandparents in this case).

    I guess I will keep trying and plugging away at finding some help with this. If nothing pans out, then atleast I will have got some experience trying. 🙂 Thanks again for your help. Regards,
    Nathan

  28. I am in a lease purchase agreement.I executed this contract a year ago.My question has to do with disclosure.The owners made a sunroom on the back by closing in the patio apparently.I questioned a slight sloping I noticed in the room,the owners said a lot of things to make me believe it was not significant.Over the past year the doors and windows have become mis-aligned,really difficult to get them locked.The owners mentioned after the fact they took the contractors to court.I can’t find it they won’t say any more.Isn’t that fraud?I would not have invested if I knew this in advance.

  29. That is one major disadvantage to the seller in a lease purchase. The “buyer” has a whole year to find things wrong, and for things to go wrong, in that year’s time.

    Sounds like you don’t want to buy it at this point, and so you need a lawyer. Are you here in the Seattle area?

    If the seller just let you leave the contract, what would you want more than simply a release of the obligation to purchase? Or is there some other remedy you are proposing?

    Unlike Eric, I am not in favor of lease purchase arrangements, except between family members.

  30. I am not in favor of them either. I prefer lease option arrangements. At least a tenant/buyer can walk away from the deal at anytime and only be out the $3500 (what I’ve asked for in the past) in option fee consideration money.

    I agree with Ardell. See an attorney. If they disclosed to you about a lawsuit with the contractors but never did so when you signed the contract, you may very well have an out.

  31. My husband and I entered into a lease with right of purchase 2 1/2 years ago. We did this only because the seller said they couldn’t sell the property under their mortage agreement for 3 years. We are only 6 months away from closing and the seller has just begun construction of two more homes on the property that we contracted to buy, leaving us with no backyard. The seller admits that he agreed to sell this land to us but refuses to adjust the selling price and says, pretty much, that we are out of luck, it’s his yard and he can do what he wants with it. The wife is a mortgage agent and has a web page were she advertises 0 down loans to people with bad credit and it makes me wonder how many poor people they have scammed. I think they wrongly believed we would have defaulted by now and under estimated our ability to hire an attorney and sue
    their scamming asses

  32. Where are you Terry? What State? I sure hope your original agreement was before the “shorplat” and the land was subdivided after your agreement.

    Even if you lot has the same tax ID and the others received new ones, there should be some way to prove that tax ID numbers lot square footage on the date of your agreement.

    Please keep us posted and if you are local, email me. I’d love to drive my it and see what you are talking about. If it is local, you can get the “shortplat” records for date recorded.

    This is definitely a “need a lawyer” scenario and not the first time I’ve seen an owner bet that the lease purchaser would default. It stinks to high heaven!

  33. Wanted to let you guys know about a new website where you can post all of your rental/lease option properties for FREE! It is called LeaseBuyOption.com. Let me know what you think!

    Michael Davis
    LeaseBuyOption.com

  34. I have gotten into a lease option where I first looked at a house and the ad stated a certain amount for lease with an $200 amount back towards option. When scheduling to sign, the monthly payment became $200 more per month. Then there WAS ANOTHER HOUSE THAT WAS AVAILABLE. Well when looking at the house it was to be 2700 square feet. It did not look that large. Well I decided to try lease option on this. We are on the way to meet with them. I get a phone call that they need cashiers check for option. I stated that usually you do not pay option until option is taken. I also stated that my realtor should be present for a third party or to look at papers. If you like option to purchase..”that is an option” If you lease and pay lease and have $200 a month back that go towards down and have option and have a time to take out option then shouldn’t you pay at option, option amount. There were some things that needed to be fixed on house, and which I wrote down list. If these are not done at option and they decided not to do them, what then. How do you know you are getting money back? Then the person signing papers was not the owner stated on title as owner or present as power of attorney or as property manager. And then I find out after the fact there was a realtor fee to one of the supposed owners who was not an owner at all.

  35. My Husband and I entered into a Lease Purchase Agreement in Texas using an Agent who in turn found us an Investor from another state. We paid a large amount of money upfront as down payment and for upgrades to the home. The Investor purchased the home and we pay montly rent. We were told by the Agent that we would be able to purchase the home in 12 months and that a certain amount would be credited toward the purchase. We are now at the end of the lease and are not able to qualify for a Mortgage Loan to purchase the home. How do we get our monies back from the Investor and/or Agent??. Were we scammed!!!

  36. Hello,
    I’m just reading Eric’s post on lease/rent to own opportunities in the Seattle area.

    Eric – I would like to reach you to see if you are still working on deals like these? We have been “serial renters” for over 10 years, and now need to find another place to live by March 1st. We’re currently on Queen Anne and would like to stay. I see dozens of condos and other properties that seem to be sitting empty that are for sale. I would love to work with someone that might be able to help us break our cycle of renting (and moving!) with a potential lease to own option. Can you contact me? Many thanks!

  37. Hi Michele,

    I’m not sure that Eric is in Real Estate any more, though he might still recieve emails on his posts, so he may contact you with information which could help you. I saw your question on the side bar and wanted to give you some kind of answer before it disappeared, and you got no response. If Eric doesn’t contact you in a few days email me, and I will see if I help you with some answers.

  38. The popularity of the lease to own may be waning a bit.

    One of the best features was the ability to participate in the growing equity, with property values rising rapidly. That does not seem to be the case today.

    The other nice feature was that some lenders would allow the buyer to complete the transaction at the termination of the lease, and use the HIGHER of sale price or appraised value to base the loan upon, thus allowing the buyer to qualify for 90% financing without an immediate infusion of 10% cash down.

    In ALL other cases, the lender will use the LOWER of sales price or appraised value.

    I do not think there are many (if any) lenders left that will still do that program.

  39. Craig,

    Disclose to whom?

    Roger,

    I disagree. Lease Purchase was traditionally a way for someone to accumulate sufficient down monies (even the small amount FHA requires), so that they could buy it at some point down the road.

    There is much confusion between a lease with an Option to Buy (which does not make sense right now) and a Lease Purchase which makes mega sense right now. Unfortunately most common practice combines these with pieces of one and pieces of the other and calls it Lease Purchase. A TRUE lease purchase is perfect for what ails this market, if only people understood what its intended use is and how to do one.

  40. Ardell:

    That’ll teach me not to read the whole string!

    I have not heard of the True Lease Purchase before.

    Since this post is so old, and you say that this is a perfect solution for current market, maybe you could do a new piece on the subject?

    From the lending perspective, the initial transaction would clearly be considered an investment purchase. Do you know how would financing play out for the tenants at the end of the lease? Do the tenants have to accumulate the down payment somewhere, or do they get to use the equity in the home, as in the Lease with Option to Purchase, for the downpayment?

    And clearly, in both types, it is wiser to have the rents paid into an escrow/3rd party, as it provides protection for both parties, and a much cleaner paper trail for VOM’s, and establishing equitiable interest.

    Thanks for jumping in there!

  41. I will do that Roger. 3rd parties are used when the payments “wrap” the mortgage, which is not necessarily an Option to buy OR a lease purchase. So I’ll try to cover all three scenarios. The 3rd part wrap is used most often when the amount of the rent is equal to the seller’s mortgage payment.

  42. Does the lessee in these cases qualify for income tax deducion on fed documents? If so is it the full amount? Do these leases qualify for FASBA 13?

  43. Hi, my husband and I signed a lease option to purchase home 2 yrs ago in Washingtion State. We agreed to do a lease option for 2 yrs with 5000.00 down and 250.00 above the rent amount to go twards the purchase price. We were told that if we were not ablt to get lending by the end of the 2 yrs that the owner would do an owner contact with us. So we agreed and signged the paperwork. Now that we are at the end of our term and asking to exersize our option to do an owner contract due to the economy and no lending, he just told us that he doesnt own the property out rigtht and he can only offer us another year lease, and that we will have to forfit our deposit and extra twards the purchase price since we were unable to get funding to buy after 2 yr lease agreement. I want to know if we have a leg to stand on? We were decieved, and our paperwork doent state owner contaract, we only have a verbal agreement. What do we do and where do we go from here? Please help..

    • Jennifer,

      First, the person who wrote this blog post is no longer associated with this blog or real estate, as far as I know, so I will attempt to answer it for him/you.

      As an example, many people bought homes and were told by their lender that they could refinance in 2 years at better rates. Lending changed…those verbal representations became empty promises, and that is one of the reasons you see so many foreclosures. Those verbal representations by major lenders became untrue, and the big lenders were not held accountable for “what they said would happen if…”. For that reason, I do not think you have a “leg to stand on”, just as many did not, but you can and should check with an attorney.

      It is not true that you can’t get a mortgage “due to the economy and no lending”. I don’t know where you are…but there is clearly lending happening in this economy. I can’t offer any advice on that without knowing where you are and the price of the home.

      You should have $11,000 in Earnest Money and accumulated other monies from the $250 per month…and that might be sufficient for an FHA loan, depending on the purchase price. My guess is the owner no longer has that money and he did not segregate it as per the contract. On that basis you likely have a case. If he can’t come up with the $11,000, whether he legally must give it to you or not, you might be able to get him on fraud. So DO see an attorney about the monies possibly being spent by him vs reserved toward the purchase as promised. That is likely a better case than the “verbal” representation to do owner financing.

      “But he promised…” not likely a case. “He spent our money that was supposed to be reserved toward the purchase…” likely an excellent case. Definitely worth a try. See an attorney.

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