Might "Lease Purchase" be this market's "il Salvatore"?

Lease Purchase DONE WELL could be the “Saving Grace” for a portion of what ails the current real estate market. 

If the lowest price range cannot move out, then the owners of them cannot move UP!  That creates a slowdown in all market price segments by domino effect.

Let’s look at an example of how Lease Purchase can work, and potentially help this market.  There will not be one “cure all” answer to what ails us.  Likely a dozen or more answers will equal a total solution.

WARNING:  Lease Purchase NOT “done well” could end up being just Another Brick in the Wall  in the long run, so don’t try this at home without expert guidance including an attorney drafting the governing documents.  Don’t confuse what most other people call “Lease Purchase” today, with the version I am detailing below.  This is the right way.  What most people call Lease Purchase combines “an up front option fee” to buy, and is wrong.

I will be using my condo listing in Klahanie, for the purpose of providing a break down of the sequence of events and estimated numbers.

The buyer/tenant would be purchasing the property via FHA Financing.  For the “Lease” portion of this Lease Purchase, the buyer/tenant will need only what is needed for the lease portion as to monies.  That being:

Fair Market Value Rent: $1,200

First Month, Last Month and Security Deposit: $3,000

That is all that is needed for the Lease portion of the equation.  Now let’s move to the “Purchase” side of the Lease Purchase.

To Purchase the condo the buyer would have an FHA Loan at 6.125% with 1 point.  Loan Amount of $247,350.  Monthly Payment of $1,502.92 Principal and Interest plus $200 a month for real estate taxes plus $285 a month for condo fees to Sundance HOA and Klahanie on a combined basis.  That means before entering into a lease purchase, the buyer/tenant should qualify for a total payment of $1,990 a month.  $1990 a month times 12 months divided by 30% is $80,000. 

To enter into the Lease Purchase the Tenant Buyer should be making $80,000 or so.  Of course other debt is also a consideration, but I am simplifying for purposes of this example post.

Here comes the tricky part.  Let’s say the buyer has NO MONEY as in ZERO DOWN. You can use a Lease Purchase to effect an eventual purchase if the buyer qualifies EXCEPT for the cash part.  So let’s say they have a credit score of 660, which I think is enough for FHA and makes $80,000 a year and not too much “other debt”.  If they qualify for an FHA loan except for the cash issues, then they can buy it via Lease Purchase by doing the following.

1) They pay the owner $3,000 up front for first, last and security deposit on the $1,200 a month lease. (normal lease stuff)

2) They pay the owner $1,990 a month, which is what they will be paying to the lender and HOA after the property closes.

3) The owner keeps $1,200 (the fair market rent portion) and puts the difference of $770 into a “savings account” for the buyer/tentant to accumlate the cash needed to close.

That’s it…that simple. Easy as renting.  When the $770 per month fund equals the cash needed to close, then it can close.  Let’s call that 3% of $255,000 or $7,650.  Then you would do a lease purchase to close in 10 months as $770 times 10 equals $7,650.  The Closing Costs were built into the price, and the downpayment was accumulated without the buyer paying any more than if they had bought it on day one.  The owner covered the bulk of his costs for 10 months by being able to keep the fair market rent portion.  If the buyer doesn’t close, then the $7,650 gets treated in whole on in part as Earnest Money forfeited to the seller based on the original agreement.  The $3,000 paid up front on the lease can also be used, in part, to close in less than 10 months.

That my friends IS a Lease Purchase…DONE WELL, (not the flim-flam version taught in $8,000 seminars in Vegas).  Using that method can likely solve at least 10% of the problem with today’s real estate market, and in Domino Effect create a move up benefit to the market as a whole.

512 thoughts on “Might "Lease Purchase" be this market's "il Salvatore"?

  1. I am missing something here. Where is the “lease” in the example cited? It sounds like this is simply an out-right FHA sale. I thought that a lease purchase was more in line with leasing out the home while giving the renter the OPTION to buy at some point in the future, and considering the rent and/or security deposit as part of the eventual purchase price should they so choose to buy later on.

  2. I don’t blame you for being confused, not one bit, Sniglet. Because the world at large commingled “Lease-Purchase” with “Lease with an Option to Buy”. These are two completely different things. Somewhere along the line, along with forgetting that people were supposed to have enough income to buy (among other things) someone slipped forms on a shelf that that are just plain flat out wrong IMNSHO.

    “lease-purchase — a method of acquiring ownership of property whereby all or a portion of rent payments made under terms of a lease may be subsequently applied to the purchase price”

    That is a real lease purchase as shown in my post. A portion of the rent payments are applied to the purchase price, to gather in increments the “missing” downpayment on day one. Lease purchase is the means to “save” the downpayment via a portion of the rent payments. In a Lease Purchase you are obligated to close at some point in the future. In a Lease with an Option to Buy, you are not obligated to close in the future, you have “the option” to close in the future at a stated price.

    An option to buy a house is the same as a stock option. You pay a lump sum up front to POSSIBLY buy the property at a stated price at some point in the future within a set end date. If you buy the property, you have locked in the price. If you don’t buy the property, you forfeit the option fee. You are not obligated to buy as long as you are willing to forfeit the option fee.

    If you want to buy the house right now and the only thing holding you back is that you don’t have enough cash, then Lease Purchase is the answer. If you want to rent right now, but want first right to buy the property should the owner decide to sell (so he can’t kick you out), then you want an option to buy.

    Lease with an Option to Buy and Lease Purchase are not the same thing and are used for two completely different reasons. But for some reason you will see these two commingled as if they are the same. They are not.

    Sometimes I think what “this market” needs is a time machine to go back 10-15 years before things got muddied. Often we don’t need new answers at all…we just have to remember the old ones that got shoved under a bus.

  3. I don’t think she filled out the details, but it sounds like it’s a lease at first for some unspecified period, and then they close a sale. The lease price at first equals the monthly cost to buy, but part of that is put away towards closing, if there is a closing.

    The details are a bit lacking, but I have a few problems with this one.

    First, it’s not clear if the option price is at some sort of a premium. Typically they are, because otherwise the lessee is just tying up the property, and faces no risk at all. But that might be due to the extra rent being forfeited if there isn’t a close. I guess that could be a good tradeoff.

    Second, I don’t see how this helps the current owner move up. It doesn’t give them any money at all until the thing closes, over what would be obtained by merely renting it out. So what do they do in the interim?

    Third, another timing issue. How do you possibly find someone willing to buy on these terms, and coordinate that with the purchase of another property? That seemingly would be very tough.

  4. I wrote the above before Ardell posted #2 above.

    I think you’re placing too much distinction on terminology. The real difference is just when the option amount is paid. With what you call an option to purchase, it’s paid up front. With your lease purchase, it’s paid over time. Assuming the remedy for breach on the lease purchase is forfeiture of the extra payments, it is in effect just the same as an option to purchase because the buyer can walk. The only difference is if they walk they lose what they paid over time, versus what they paid up front.

    Also, Craig could perhaps jump in on this one, but I suspect that if the buyer defaults, rather than an unlawful detainer you’re looking at a forfeiture of a real estate contract, which is a process more akin to foreclosure.

  5. Kary,

    There is no “option price” in a lease purchase. It’s a purchase contract with a long close…not an “option to buy”.

    As to your “second” there are many properties sitting on market for 10 months or longer. So having a 10 month closing AND money in the interim is a good option for sellers having a problem selling a vacant property. Some people are trying to sell their rental properties in order to tradeup. Heck, they can move into Mom’s house for 6 months if that’s how long it takes to accumulate the down money.

    This is an alternative for people whose properties could be on market for 10 months without selling at all. Take a look at condos in Renton and houses in Tacoma. Desperate times call for creative selling. This will fill the gap created by no zero down, and it is the method that WAS used before there was a zero down option in the marketplace.

    ” How do you possibly find someone willing to buy on these terms, and coordinate that with the purchase of another property? That seemingly would be very tough.”

    I don’t understand that part of your comment. This is a “first time buyer” program for the lowest end of pricing for people with good credit and income, but no cash saved. They shouldn’t have a property to sell. There are many people already in their new homes who haven’t sold the ones they left. This would be a good option for them.

    Lots of single people or people without children own condos or townhomes that aren’t moving because the buyers have no cash and there are no zero down loans. Yes, they may have to find an interim stay with someone solution. But if the math equals less time to closing than they might expect to be on market anyway…it’s a good option.

    ALSO, it helps prop up prices. A condo owner may have two choices. Lease Purchase or drop the price into the toilet until someone with money buys it as an investment. Moving to Mom’s for 6 months or 10 months is better than losing $50,000 on a $200,000 condo, don’t you think?

  6. Well, if you have to fully qualify for a lease-purchase just as if you were doing an outright purchase I fail to see what the advantage to the buyer is.

  7. Kary wrote: “The buyer could live in the house for the period, see if prices go up, and if not move out.”

    That’s not what Ardell seemed to say. If I interpret her comments correctly, the buyer in a lease-purchase is COMMITTED to close at some specified time.

    Again, if you are having to make the same payments as buying, and are comitted to buy anyway then why bother with a lease-purchase?

  8. About the only thing I can think of to commend the idea of a lease-purchase is as some sort of forced down-payment savings plan. If the buyer doesn’t have any savings for a down-payment, the money collected during the “lease” period could go towards the down-payment at the eventual closing.

  9. But they could default, and lose their “extra” payments. As Ardell wrote: “If the buyer doesn’t close, then the $7,650 gets treated in whole on in part as Earnest Money forfeited to the seller based on the original agreement.”

  10. Ardell, are you saying this is mainly for the seller who already bought their new place? I could perhaps see in that scenario (subject to my concern you might need to foreclose them out).

  11. Kary,

    Also there are people renting out of State or out of area, who can’t buy there until their now empty condo sells here. So they are wanting to “move up” or make a somewhat lateral purchase, and aren’t living in the one they are selling. This would work really well for those people and I know many owners in that situation.

    When I say “this Market’s il Salvatore” I wasn’t referring to the Seattle Market exclusively. If someone moved to CA or NY for a job and can’t buy there until they sell here, for instance. Clearly Lease Purchase on a less than one year basis could be a fabulous solution for a relocated seller.

  12. Sniglet,

    #10: yep. It is also feasible that the borrower is on the cusp of qualifying traditionally, but needs time for whatever reason and the seller (motivated) honors that.

    Lease Purchases: for the most part is a purchase.
    Lease Option: for the most part is a lease with the possibility of closing a sale. Our office has seen lease options eventually culminate in sales.

  13. Forgot to mention that some builders are now heavily pushing lease options. On a side note, I do think that when marketing a home for sale it could very well be that they are they are confusing the two. But both can lead to a bonafide sale. It is a matter of agreement on specific terms and the “option” language either being present or absent among other stuff.

  14. So, let me see if I’ve got this right. The buyer gets to pay not only the lease amount, but an extra amount ($770) each month that goes into a “savings account’ that is forfeited when he decides it would be stupid to buy a condo for $250,000 that is now worth $235,000.

    This is a great deal for the seller, and that’s about it. The buyer gains nothing over what they would have had if they continued to rent, and they lose the flexibility to make future buyiong decisions without penalty. There may be some small tax consideration, but that would most likely be canceled by the home owner’s dues.

    Too much of a stretch. These strategies worked in a rising market, but do little when prices are more likely to fall than even remain flat.

  15. Kary said: “The real difference is just when the option amount is paid. With what you call an option to purchase, it’s paid up front. With your lease purchase, it’s paid over time.”

    There is a HUGE difference. In a lease purchase there is no option money and there is no option to NOT buy the house, same as any purchase. In an “option to buy” you are buying the option with the option money and have no obligation to purchase at all.

    Go look up the terms in a glossary. Maybe in one of your old law books 🙂

    If there is no “option (to not buy)” there is no “option fee”.

    Many, many immigrants bought their first homes via lease purchase for many years in this Country. It is not a “new” concept. It is the means by which most 1st and 2nd generation Americans bought their first homes for at least a hundred years. The combination of Lease Purchase and Government programs like FHA assisted most people in buying their first homes who had no accumulated monies, but could afford a higher monthly payment.

    In fact one could say that Lease Purchase is the way for people to buy who have few if any other “options” to own.

  16. Kary,

    Your #8 is a “Lease with an Option to Buy, not a Lease Purchase”. If someone welches on a deal in a Lease Purchase, he’s a cheat and a liar and a stinker, not a smart businessman. If you want an “out” then be honest up front and ask for a “lease with an OPTION to buy” not a Lease Purchase. A Lease Purchase is the same as any purchase contract and you are expected to proceed “in earnest” and “in good faith”.

    It’s about integrity. Do what you say you are going to do. If you are buying and only renting until you are able…then it’s a Lease Purchase. If you are renting and want an option to purchase, maybe and if things look good later, then it is a lease with an option to buy.

    Don’t confuse the two. They are not the same. One is a renter and one is a buyer from day one. They are not the same.

  17. Ardell wrote: “assisted most people in buying their first homes who had no accumulated monies, but could afford a higher monthly payment.”

    Really? My understanding was that historically rent prices were virtually the same as purchase prices (if not higher). It has only been in recent years that the costs of home-ownership exceeded the cost of renting. Thus, it would seem that purchase-options really aren’t attractive. At least not until the monthly payments for the purchase option would be the same as rent.

  18. Sniglet,

    Lease Purchase is for someone who wants to buy right now, and the only thing holding them back is there are no zero down loans. They must first qualify for an FHA Loan except they don’t have the cash needed. The cash to close has to be the ONLY missing piece to why they aren’t buying right now. As soon as the set aside monies equal the money needed to close…it goes to the closing table.

    THAT is a Lease Purchase.

  19. I could see this being a possibility for borrowers who have had a recent ding on their credit (FHA financing prefers the last 12 months to be free of lates) or who are working on paying off some collections, etc. Would a lease option be considered for a borrower w/blemished credit?

    Especially w/down payment payment assistance programs going away at the end of this month, those who are shy on the 3.5% down payment for FHA–maybe they don’t want to dip into their 401k (or borrow against it) and maybe they don’t have family who can chip in or they just want to do this on their own.

    Ardell, with this type of agreement, does an attorney need to structure it or are their forms provided to agents (via NWMLS)?

  20. Sniglet,

    Yes, the cost to rent and the cost to buy were the same, at least on an after tax basis. The monthly was inflated to create the “forced savings” to accumulate the downpayment. Or in some and even many cases, the seller agreed to less than fair market rent by keeping 2/3rds of the fair market rent and setting aside 1/3 for the downpayment.

    Many immigrant homeowners here helped new people from their Country in this manner. That is why there were so many neighborhoods of all one ancestry in the larger cities for so many years.

    In my example above, the inflated monthly in excess of fair market rent value equals the eventual mortgage payment. Basically the lender gets to see that the buyer is able to make a payment equal to the mortgage amount. It really helps with the loan approval and the buyer also gets to prove to himself that he can afford the mortgage before he takes it on legally. It’s a real win-win.

    You need expert assistance as this done badly could look like a “silent 2nd” which is illegal.

    A silent 2nd is where the seller inflates the price and pretends there is a downpayment. If you don’t keep good records of setting the buyer’s money aside every month, and the seller just wants to “say” he got the money…that is illegal. Not too long ago I saw a builder go to jail for that. Be on the lookout for silent seconds in this market. There will be temptation to do them.

  21. Side FHA note: someone with an income of around $60k could qualify for the FHA total mortgage payment of $1900 (if they have low monthly debts) and the rate I quoted on Friday (that Ardell has referenced) would be valid down to a 620 credit score.

    FHA does not have strict qualifying ratios.

  22. Rhonda,

    1) Dinged credit should be an option to buy, as the reason for the delay is not the cash to close. Lease Purchase if for cash reasons only, as it is an outright promise to buy. With dinged credit there’s always the potential for another ding. It doesn’t have a guarantee at the end of x months like saving the downpayment does.

    2) It really is a normal lease contract and a separate purchase contract with a long close date. Of course they have the right to cancel the lease at close of escrow. There is a legal contract that melds the two and sets the provisions for all the what ifs. That has to be drafted by an attorney based on the specific agreement.

    So the agent can draw up the lease. The agent can draw up the purchase contract. Two completely separate agreements. Then the agent sets the “meeting of the minds” on a separate paper with some “what ifs” and the attorney reviews both contracts and draws up the final paperwork.

    I did many of these back in the old days before zero down loans and in the last market that was as bad as this one. The seller usually gets a good enough price to make it worth it, the same as a contingent offer. A price based on the comps would be appropriate. In a down market, that’s a really good price for a seller. Everyone wins.

  23. Rhonda #24,

    I always “err” on the side of extremely conservative and I even stretched this from 28% to 30%! I’m using a 30% front end and that really is high enough! What are you using for the front end and the back end to get to $60,000?

    Let’s see. If payment is $1,990 and income is $60,000. $60,000 divided by 12 is $5,000. That would be 40% of GROSS INCOME before car payment, etc. That’s too high. You COULD qualify, but after what this country has been through…that is too high.

    FHA should not be doing a 40% front end. What is the back end for Crissakes?

  24. Rhonda,

    I don’t understand your question #26. If they have the cash to close including downpayment, then you would do “a real estate contract instead”. Did you mean a “land contract”?

  25. Kary #12,

    I’m going to answer some other people I missed first. I’ve already given you more than your share of answers 🙂

  26. Scotsman #16,

    I agree with you. This is ONLY for someone who really wants to buy for whatever reason. The people I see doing these are the people who really hate to move, like people who have been forced out by condo conversion projects etc.

    People who were forced out of their rental by the owner are often the best candidates for lease purchase agreements.

  27. 1900/5000 = 38% for the front ratio…high yes, but possible (and happens often) and I did say they shouldn’t have much for other debt. I would prefer to see lower as well, but I’ve seen these approvals. Back end ratios can be 45% (or possibly higher) based on the response from automated underwriting.

    Regarding contract, I was referrring to a recorded real estate contract (more common in earlier years–BMT–around here and not used for just vacant land).

  28. Kary #11 and #12,

    Why would a seller take a contingent offer, Kary? Lease Purchase is an option for someone who is priced at the comps or below the comps but still can’t sell. It’s an alternative to yet another price reduction.

    As to the buyer could default…oh well. The buyer “can default” on ANY purchase contract. At least with this one the seller has some money to cover his mortgage payment in addition to the forfeited Earnest Money.

    How much of the accumulated funds are forfeited? Usually the same amount as any “Earnest Money” amount on any purchase agreement. If the accumulated fund is more than the normal “Earnest Money” amount, then the seller keeps some and the buyer gets some back. That arrangement is laid out in the attorney drafted separate agreement I referred to in item 2) of my comment #25.

  29. With qualifying for FHA (or any mortgage) sometimes not all the income can be used–perhaps the spouse changed their line of work or the way they were paid…maybe they just started receiving bonuses…so sometimes ratios being pushed is more acceptable than others (two people scraping to buy all they can w/no other obvious earning potential).

  30. Sniglet #10

    Yes, it’s a forced savings. In the old days, like in my neighborhood, the people doing these had tons of kids. Every “extra” dollar found a mouth to fill. Large and poor families like mine NEVER had “extra” money. My parents never leased from the time I was 3 or so. Before that I think they did. I’ll have to ask my Mom.

    I know my next door neighbors with 6 kids bought their house this way and many others in the neighborhood too. It was a way for those who did well in this Country to help other people in a “paying back” kind of way.

    I did something similar with one of my clients a few years back with a short “seller carry” 2nd. There was no reason for the seller to do it. It was a hot market. But you know what? There’ are some really nice people in the World. There really are. Go figure? 🙂

  31. What happens if the lenders refuse to fund the deal when they try to close as contractually stiupulated (one or two years after signing the option-purchase agreement)? Would the buyer just forefeit all the money they had paid throughout the time of the lease?

    Can these agreements be made subject to financing? If so, then maybe these lease-purchases would be a good hedge for buyers. If real-estate prices keep declining you have a get-of-jail free card.

  32. Rhonda,

    Well I’d still say $80,000 in my example. I don’t want everyone thinking a 40% front end is OK. Most people have at least one car payment and some two. We don’t want them eating hot dogs and beans for 30 years.

  33. Sniglet,

    In my example it takes 10 months or less. Usually these are for 12 months or less and often for 6 months. You are only accumulating the FHA required downpayment, which is 3% or actually a little less. The tenant/buyer should have a pre-approval except for cash to close before entering into the agreement. The lender is processing the loan from day one and it closes as soon as the money is accumulated.

    It really is a purchase with a long close.

    No they are not subject to financing. If it is that “iffy” and you need two years or a Finance Contingency, then you go with a Lease with an Option to Buy, which I do not recommend at all at this time, unless…

    Some people really do not want to move again. Often people with elderly or handicapped family members or pregnant women. Yes, buying six month’s ahead of time backs you up six months as to price considerations. But for many people that is the least of their concerns.

    If you have lots of kids and pets, you just want a home, and if this is the way to get it. 2% of price this way or that is not a big issue for most people.

  34. PS to all,

    When I started in real estate 120 day closes were NORMAL. These 30 day closes are really a recent event. Many people used to save money during the contract.

    So do you know why closings are most often 30 days and why and when that started?

  35. Ardell wrote: “In my example it takes 10 months or less. Usually these are for 12 months or less and often for 6 months.”

    So, what happens if at the end of 10 months the value of the property has dropped substantially? Will FHA still fund the loan for the original agreed price? If not, what happens?

  36. It’s a valid point Sniglet, but there are all kinds of monsters in the dark closet if you want to “go there”. King County prices are down what? 6%-7% or so since peak. Do you know how many people overpay for a house by 10% every day without knowing it? Do you know how many people overpaid by 20% or more during the days of the bidding wars?

    If we want to play a bunch of fearful “what ifs”…well lets go all the way.

    1) What if interest rates go up and the buyer doesn’t qualify at the new rate (that’s why I wasn’t pushing on the ratios Rhonda)

    2) What if it’s a married couple and they file for divorce by the time it’s supposed to close?

    3) What if the man comes home and finds his fiance in bed with his best man, does he still have to close escrow?

    4) What if the house is burglarized, and the buyer finds out that is why the seller moved out in the first place and didn’t disclose it?

    5) What if the buyer wins the lottery and wants to buy in Hawaii instead?

    6) What if McCain is elected president and the buyer is drafted into the service two days after the Inauguration?

  37. Sniglet,

    I’m using a tradtiional example, but if you are worried about prices, and I don’t blame you, there’s no reason you can’t structure it differently.

    You can ask for ALL of the rent to be applied against the purchase price. That might give you a cushion as to values going down. Get creative!

  38. Ardell, I don’t want to mess w/your example at all 🙂 my only point was to let readers know that FHA’s ratios and guidelines may not be as strict as they think. I’m always pleased when buyers choose their mortgage payment by their comfort level and goals rather than push themselves to the financial limit.

  39. Rhonda,

    Given a Lease Purchase is a longer close, the seller should not let the criteria other than cash be pushed to the limit. Also, without a Finance Congtingency, the buyer shouldn’t either.

    There should be room for movement given the extended timeframe.

    Speaking of which, I heard that some people are starting to put rate caps into the contract. Most other areas have a rate cap in the Finance Contingency to cover buyers in the event interest rates rise by 1/2 to 1 point before close of escrow.

  40. Rhonda #33,

    Yes, that is typically called a “land contract” even when it is not about vacant land. But I think the buyer would be better off with a “seller carry” in that case.

  41. Kary,

    Lease Purchase = a Seller and a BUYER
    Lease Option = a Seller and a TENANT (who may buy)

    Lease Purchase is the reverse of a Seller Rentback. It’s a Buyer Rentforward.

  42. Ardell wrote: “There is a HUGE difference. In a lease purchase there is no option money and there is no option to NOT buy the house, same as any purchase. In an “option to buy

  43. Sniglet wrote: “Really? My understanding was that historically rent prices were virtually the same as purchase prices (if not higher). It has only been in recent years that the costs of home-ownership exceeded the cost of renting.”

    I don’t think that’s correct, at least when you compare apartments to condos. It was only the last few years that owning was as cheap as renting. Not sure about houses, but I suspect the same thing is true there.

  44. Sniglet: “Would the buyer just forefeit all the money they had paid throughout the time of the lease?”

    There is a limit to the max amount a seller may keep as forfeited Earnest Money in the State of Washington. So no, the seller may not keep “all of the money” if it exceeds that limit.

  45. Good morning, Kary! I was catching up on comments while everyone was sleeping 🙂

    Kary #48 – No, it would not be a foreclosure. It would be the same as anyone defaulting on a Purchase and Sale Agreement. No “buyer” should enter into a Lease Purchase intending to possibly default. In fact the remedy in a Lease Purchase should be Seller’s Damages and not merely “liquidated damages” due to the extended timeframe and wear and tear on the house.

    Almost 100% of purchase contracts have a “forfeiture of Earnest Money” and “liquidated damages” as the option chosen. For Lease Purchase agreements, often liquidated damages is insufficient and the seller should reserve the right up front to real and proven damages. This would make the buyer responsible for the difference between the eventual sale price and the contract sale price.

    Kary #49 – Sniglet is correct if you consider most of the Country and not simply West Coast. That’s where all the “Buy vs. Rent” tables came from. It was cheaper to buy on an after-tax basis, and still is in parts of the Country.

    Kary #50 – It is the agent’s job to convey the true intent and meeting of the minds via written contracts. If you know the intent is to Lease with an OPTION to buy, and you write up a Lease Purchase instead, then both the buyer and the seller should sue you if the buyer defaults saying “Kary said it didn’t matter and I had the “option” to default.”

    When I’m writing a contract and the buyer says “how do I get out of this” while I’m still preparing it, I STOP dead in my tracks. No one should make an invalid offer, and no agent should proceed with writing an offer when there is already buyer remorse before they sign the contract. Yes, there are legal outs, but they should not be used for “changing my mind about buying”.

    You seem to be saying the buyer can just SAY they are buying…but decide later. Not so. That’s a Lease Option NOT a Lease Purchase. The seller has the right to know up front what the real intention is so he can make an informed decision.

  46. Ardell wrote: “Kary #48 – No, it would not be a foreclosure. It would be the same as anyone defaulting on a Purchase and Sale Agreement.”

    This gets back to my question for Craig in post 4. My recollection is that if you let someone into possession earlier than closing, that in some situations the remedy to get them out is foreclosure (or technically forfeiture), because they’re in possession under a contract, not a rental agreement. That raises the question of what happens if they’re in possession under both? I would never consider having a seller client allow a buyer in early without consulting with a real estate attorney on that issue.

    From the buyer’s side it’s not such a risk, in that they can avoid the foreclosure (forfeiture) by simply moving out. But from the seller’s side it would be a great risk. Real estate contracts to purchase have been out of favor so long I don’t remember the remedies for certain, but I think they basically parallel the foreclosure process. Add in the buyer filing bankruptcy just prior to the sale, and the seller could be caught up in this mess for 6 months or more–with no payments and no ability to sell. Absent case law that explicitly deals with the issue, and rejects the need for a forfeiture, I’d be very reluctant to enter into such a deal as a seller.

  47. Kary #53.

    Thanks Kary, but let’s also make it clear that if the remedy checked is seller’s damages, as it should be, then that limit will not apply. Also, an option cost can exceed the statutory limitation for forfetiure of earnest money.

    If you want to rent and “maybe” buy…then pay for that option. Don’t pretend you are buying if you are reserving the right to not buy, at the time you sign the purchase agreement.

  48. Kary said: “I would never consider having a seller client allow…”

    Never say never Kary. Look at Florida with whole neighborhoods full of empty houses and six foot tall grass. In an extended bad market, agents need to look at what is best for their client, and often some money in hand is the lesser of two evils.

  49. Kary wrote: “It was only the last few years that owning was as cheap as renting”

    Huh? Owning hasn’t been as cheap as renting for a LONG time. Certainly the costs of renting either condos or single family homes in the Puget Sound has been LOWER than the costs of ownership for at least the last 10 years. The only way a rental property has been able to pencil out for a landlord in the last 10 years is to count on appreciation.

  50. Just to follow up on the risk, with an election of damages remedy in one of these things, I’d compare this type of transaction to writing a call option on stock, or perhaps just dealing with stock options in general.

    The difference between buying a stock, and dealing in options is that with options your time frame is limited. If you own the stock and it falls 20%, you do have the ability to simply ride it out and see if the value returns. That is similar to owning a house. Many/most people really aren’t affected by the rise and fall in house values, because they have no intention of selling in the foreseeable future.

    But if you enter into certain stock option transactions, your gain/loss is determined at a certain point in time. There have been some very wealthy people completely wiped out by a wrong move in options. And the same could happen to someone entering into one of these transactions on a house, because if the values fell and they couldn’t perform (and a financing contingency was not applicable for some reason), their loss would be practically set in stone the day of default. They’d have no ability to just ride out the market. Even if they could still afford the higher monthly payments (the substituted mortgage payments), they’d be facing a huge loss. I wouldn’t recommend that for the type of person described as the buyer in the original scenario.

  51. Sniglet wrote: “Huh? Owning hasn’t been as cheap as renting for a LONG time.”

    About 2-3 years ago we started losing a lot of tenants to condos, because the financing options were so cheap. That was something new.

  52. Sniglet,

    Where land value is significant, owning is never as cheap as renting. An Ocean Front property in CA as example. Renting the structure on an unobstructable view property is never more costly than the mortgage payment, nor should it be. The limited commodity of oceanfront property will always rent for less than it costs to own it.

    A run of the mill condo across from Microsoft used to sell for $79,000 and rent for $650 not very long ago. Rent vs. Buy almost never worked for a 3,000 sf house. It almost always worked for a one bedroom condo on an after tax basis. Remember you can write off the real estate taxes and almost all of the monthly payment in the first years of ownership. So you have to look at the net cost and not the gross monthly payment.

  53. Kary,

    You are still not looking at this right. LEASE PURCHASE IS THE SAME AS PURCHASING IT TODAY! except you close later. What happens if you go buy a house cash today and prices change in six months? Same for Lease Purchase. Lease Purchase is buying a house, not renting with an option to buy later.

  54. Ardell, I think I already answered your post 63 with post 60.

    You’re suggesting a transaction that would be very risky to the buyer if it’s an election of remedy transaction.

    This sort of reminds me of the ploy of a seller paying points to get the buyer a reduced interest rate, in lieu of reducing the price. Sure that’s great for the seller, but it doesn’t always make sense for the buyer. I’ve not exactly figured out a good way of doing the calculations on that, but I think it only makes sense financially for the buyer when they keep the same property and loan for something around 10+ years. Now it might make sense for them if they really love and or need the house, and monthly payments rather than value is the only issue, but it’s really a bad move overall absent significant future appreciation.

  55. Tim, I sort of touched on that in post #3 above–the “First” point. What Ardell refers to as a lease option typically would have a premium, but I don’t think these would.

    But the problem is, sure you can factor in future value–the problem is what happens if you’re wrong!

  56. Kary and Tim,

    Here are the choices.

    1. Rent – don’t buy
    2. Buy – don’t rent
    3 . Lease purchase
    4 . Lease with an option to buy

    If you are sure that prices are going down and you don’t need to own now, then you would be at choice #1!!!!!!!!!

    If you are sure that prices are going up, could be true somewhere in this Country, but I don’t know where, then you would choose #4 with a significant penalty to the seller if he doesn’t honor the option price.

    If you have to move out of your current rental, and you do not want to be tossed on the street again by a landlord and so want to buy today, but you don’t have the cash to buy today, then you choose #3.

    If you just took a new job and don’t want to make a commitment, but want the right to stay and buy and not move after you get acclimated in your new place, then you choose #4

    What you DO NOT do, Kary is PRETEND to be doing #3 when you are really doing #4!

    Here’s were the agent “predicting” what is most likely to happen with prices comes in very handy Kary!!!!!!!!!!!!!!!!!!!!!!!

    You always say agents shouldn’t predict, but you are dead WRONG on that.

    I predict prices are going down…that helps my clients make the right choice from the get go. You act like you can’t tell, so your clients have to look for a bunch of loopholes. That’s were what “we used to be” before we were agents makes a HUGE difference.

  57. “a buyer needs to structure the lease option with future value in mind”

    Not quite Tim. A consumer needs to have a future value in mind before deciding whether to be a buyer or a tenant.

  58. Ardell wrote: “Where land value is significant, owning is never as cheap as renting”

    Maybe not in the last 20 years, but for most of history owning and renting were about equivalent. We have seen a historically abnormal rise in property prices since WWII (and particularly since the mid ’90s) that throws all these traditional measures off kilter.

  59. Sniglet,

    My only regret in life is that I did not buy oceanfront property in 1972 🙂 I should have stayed in my Mom’s house until I married in 1983 and bought oceanfront property in Manhattan Beach CA with every dime that I earned. Of course I only know that due to hindsight. If I had a time machine…that is what I would do.

  60. Hi Ardell,

    Forgive me if this was already covered in the comments (busy day for me today) but my concern is financing. If the loan will not closing for a few months, what happens if interest rates go up or underwriting guidelines tighten?

    Thanks!

  61. Jillayne,

    There are 3 pieces to a Lease Purchase as detailed in my comment #25 item 2), but I’ll repeat them here for everyone’s benefit.

    1) You write up a purchase agreement as if you are buying today with a long closing. When I started in the business many closings were 120 days, not the 30 day BS agents push today. So covering many bases is not all that hard to do. Just not common practice anymore.

    2) You write up a lease agreement the same as if someone is leasing as of today, you just have the right to cancel at time of purchase without penalty.

    3) An attorney writes up a melding agreement with the “what ifs” and the agent outlines those and the parties agree to the consequence of potential what ifs.

    As to interest rates, almost ALL other areas have an out if the rate exceeds X (fill in the blank) WA used to have that and took it out of the Finance Contingency. If they had not done that, people would have had a right to cancel if the rate was subprime vs. A Paper. Whomever took out that rate cap in the NWMLS Finance Contingency is largely responsible for what is happening to people right now, and should be hung at high noon.

  62. Jillayne: “If the loan will not (be) closing for a few months, what happens if interest rates go up or underwriting guidelines tighten?”

    More succinctly, the example is based on an FHA transaction, as the cash needed is minimal and suits Lease Purchase scenarios best.

    Per my discussion with Rhonda, I used $80,000 as the income vs. $60,000 to allow stretch room in the event interest rates change modestly. A rate cap should be inserted for a minimum of a 1/2 point spread and a maximum of a 1% spread. That’s a negotiation.

    That covers both issues. If guidelines are tightened…no sweat. You don’t do these stretching to the max allowable as to approval guidelines, and you don’t do these if the buyer wouldn’t qualify if interest rates shifted by up to 1% and you give the buyer an out if rates, and possibly prices, shift dramatically prior to close of escrow.

    For those who worry about prices falling, as well you should, all you have to do is a “must appraise” clause to be invoked no later than two weeks prior to close of escrow.

    The “what ifs” are many and varied depending on the needs of both the buyer and the seller and the specifics of the property. Expert advices are needed to construct these.

    Like I said in the post “WARNING: Lease Purchase NOT “done well

  63. Kary,

    In 2004 and early 2005 I counseled people to make decisions based on the expectation that the market would go up in the short term. In 2008 I counsel people to make decisions based on the expectation that the market will go down in the short term.

    Agents MUST be able to PREDICT or they are not worth what they are paid. Pure and simple fact. You don’t pay a stock broker to put stock names on a board and throw darts…do you?

    Anyone who is a professional in a moving market MUST have some predictive “powers” or hire someone who does. OR…they can do as Craig does. Charge a small flat fee and say price issues are your problem, pal.

    When people ask me what the value of the house will be in five years, in ANY market, I look at them like they have two heads and tell them if anyone has an answer to that question RUN!!!

    Lease purchase is ideally for a 4 to 10 month timeframe and treated the same as if the buyer is buying today. If the buyer isn’t buying today…then they are renting. No problem. Just be honest with the seller from the getgo. All agents must be honest with all parties to the transaction. Do not write up any kind of “purchase” contract for someone who isn’t really buying at the time they sign the contract.

  64. Ardell wrote: “I predict prices are going down…that helps my clients make the right choice from the get go. You act like you can’t tell, so your clients have to look for a bunch of loopholes. That’s were what “we used to be

  65. Sniglet wrote: “Maybe not in the last 20 years, but for most of history owning and renting were about equivalent. We have seen a historically abnormal rise in property prices since WWII (and particularly since the mid ’90s) that throws all these traditional measures off kilter.”

    Three words: Two income households.

  66. Ardell wrote: “When I started in the business many closings were 120 days, not the 30 day BS agents push today.”

    Okay, I give up. Just why do you think 30 days closing are BS? Maybe you should just do short sales! 😉 😀

  67. Thanks Ardell that definitely is one to dust off and use.

    Let me ask you Ardell. Do you get a title report up front? Who holds the above market rent money? Do you use a third party to pay any underlying note(s)?

    I have used lease purchases in the past but not for the purpose of saving for an FHA down payment (btw it goes to 3.5% Oct 1). I have used them while the buyer was dealing with other items, like job seasoning… The above market rent is what keeps the buyer in the game, I like it.

  68. Isn’t this entire discussion a bit academic. How many people are there out there that don’t have 3% now, but could have 3% in 10 months?

    Rob, of course you’d get a title report first. The buyer would be foolish not not.

    Good question on the who holds the money. At a minimum I think it would be required to be held in a separate account, like a rent deposit, but really it should probably be held by an escrow. I wonder if you could get the same escrow to pay the mortgage and taxes? That would be best because absent that it would be yet more risk for the hapless buyer.

  69. Kary said: “This thing may work for certain sellers…”

    Again, that’s the point. See post Title. It’s about selling property, owners, and bolstering market prices. The people who aren’t buying don’t need “a Savior”…the market and the sellers do.

  70. OK, I’m up to comment 78.

    Mostly it’s because agents don’t like to wait too long to get paid. It really isn’t all that realistic of an expectation for everyone to be writing 30 day closings on most contracts, regardless of the seller’s circumstances.

    But maybe the % of 30 day closings isn’t as high as I think it is. I’ll ask Tim.

  71. Rob,

    You do everything the same as you would do with any lease and any purchase and sale, both.

    Since the attorney has to draft the melding contract stipulating how much would be forfeited as Earnest Money, etc, I would think the attorney could collect the monthly, pay the seller their Fair Market Rent Portion and hold the rest in escrow pending the closing.

    I haven’t found the kind of real estate attorney (one that represents the transaction and not either party) here in Seattle. There were scads of them in PA where I did these in the last bad market. Here it seems everyone expects everything to be “adversarial”.

  72. Kary, I’m afraid I know of people who currently were foolish not to get a title report…amazing to me, but I come from that industry…but this stuff does happen when “professionals” are not involved.

  73. Ardell, I know I”m jumping back a bit…but…it’s a weekend and we were running around w/our kids…this is from comment 40: “When I started in real estate 120 day closes were NORMAL. These 30 day closes are really a recent event. Many people used to save money during the contract”

    Saving money during the contract is fine and dandy; HOWEVER underwriters (especially w/FHA) will want the money to be “seasoned” (this means showing that it’s been in your bank account, ususally for at least 30-60 days w/out large deposits).

    When I have buyers providing me bank/asset statements without the down payment and they tell me “I’m going to get paid on it” or “it’s coming” THIS COULD BE A RED FLAG.

  74. Rhonda,

    I’ll change that to “would CONTINUE to save money during the contract” 🙂 If the buyer can pay the higher amount for 6 to 10 months, it really is a good start and everyone knows they can handle the payment before they make the long term commitment. Everyone including themselves. It’s not a bad plan. They don’t have any moving costs at the same time as the closing. It can be a very smooth and satisfying event for all concerned.

    Just like Contingent sales, it is expected that the buyer may pay a little more for the house with these terms than if they were cash buyers. That’s just the leverage issues of negotiation. Still for many who are “missing” the zero down loans, this could be an alternative method of purchase.

    I’m doing Sunday Night Stats with my right hand while I’m doing this comment with my left hand, and sales are down more than 50% in Tacoma and Federal Way. There are 46% more homes for sale than have sold since the first of the year. There is almost a full year’s supply of inventory on market right now. There are many people who can’t buy now in areas like this where home prices would fit into FHA guidelines.

    I’d rather see someone test that monthly payment before buying, using Lease Purchase as “a trial run”, than bite off more than they can chew. That peace of mind is clearly worth something. It’s not for everyone, but it should be one of the options for buyers and sellers in this market.

  75. Ardell, I’m w/you 100% on having someone test their payments before they buy. In fact, I’ve written about potential buyers paying themselves first (w/the mortgage payment) before actually making a mortgage payment. The last thing in the world I want is for someone I’ve helped with a mortgage to come back to me because they cannot make ends meet.

  76. Rhonda,

    The key is to have the mortgage professional basically take a full application before the buyer enters into the purchase agreement. There should be room for things to change and the only issue for full approval should be the cash issue.

    It works well for people who are being tossed from their current rental, and are motivated to buy so that they can’t be asked to leave their “home” again. They may not have saved money to buy because they didn’t intend to leave their current home that they are renting.

    A lot of people who were displaced by condo conversions would be candidates for this method of purchase.

  77. Ardell said: “Kary said: ‘I’m not making a prediction.’

    I know. You should. That’s the point.”

    Ardell, unlike you, I don’t do things that I have insufficient training for and insufficient access to data. And in case you’ve forgotten, I’d support an ethical rule or statutory change that would prevent agents from making predictions. I consider agents making predictions to be part of the problem, not some sort of solution.

    The problem with your comparison to stock brokers is most don’t actually make predictions. They rely on what their firm’s gurus say. And most of those gurus are wrong. But in any case, they rely on a lot more data than past stock charts and a hunch, which is basically all any real estate agent making a prediction does. Which makes agents even more likely to be wrong than the stock gurus, most of which are wrong.

    So tell me, why should agents give their clients worthless information (predictions)?

  78. Maybe the 120 close explains why short sales take so long. Banks are living so far in the past that they don’t realize how out of date they are! 😉

    Any vacant property would probably prefer a 2 day close. People looking to buy after they sell a 60 day close. There is not a single number that works for everyone, but I can’t see that many people would be happy with a 120 day close.

    Stated differently, I don’t think it was just agents that would have called for such a change.

  79. Sorry for being so late to the party! You guys are amazing “weekend warrior” bloggers!

    Here is my two cents: I’m having a hard time wrapping my mind around the transaction. It sounds like there would be a lease for an indefinite term equal to the closing period or, I guess, terminating upon buyer’s default under the PSA. Thus, there would also be a PSA. So, the buyer would be a tenant as well, and the seller would be a landlord. The WA Residential Landlord/Tenant Act specifically exludes from its scope this very situation, so I guess the obligations between the parties would be governed by the common law, which would certainly introduce some ambiguity. I don’t think that this would constitute a means of financing and therefore be considered a real estate contract (the term used in WA that equals Ardell’s “land contract”) but I’m not certain. If so, then there would be legal implications for any default and subsequent remedy by seller.

    Ultimately, I would need to think and research long and hard before I was comfortable even weighing in definitively on the subject, let alone drafting the documentation to make the transaction happen. Speaking of which, no attorney in his right mind would “represent the deal” under these circumstances. While things are not always adversarial, they ALWAY have the potential to become adversarial. That is why an attorney must represent only one party. With all of the uncertainties here, it would be essential that a lawyer represented only one party in order to competently represent that party and protect her interests.

    Ultimately, I tend to agree with Kary. This seems all rather academic and unlikely to actually be necessary. One of the biggest benefits accrues to the market and not to either party: propping up of prices. That benefit in no way justifies the cost and possible risk in making this transaction happen. The buyer could rent a place and save their own money rather than being compelled to have the seller save it for them. If the buyer is incapable of managing their finances in order to save the money, are they really a good potential tenant, particularly where the landlord would be operating outside of the RLTA?

  80. I did some looking, not complete by any means, and I found this on real estate contract forfeitures:

    RCW 61.30.010 Definitions.

    (1) “Contract” or “real estate contract” means any written agreement for the sale of real property in which legal title to the property is retained by the seller as security for payment of the purchase price. “Contract” or “real estate contract” does not include earnest money agreements and options to purchase.

    Assuming the forfeiture act carries through and only covers “contracts” I don’t think this type of situation would be covered by this act.

    I assume Craig’s recent post refers to this:

    RCW 59.18.040 Living arrangements exempted from chapter.

    (2) Occupancy under a bona fide earnest money agreement to purchase or contract of sale of the dwelling unit or the property of which it is a part, where the tenant is, or stands in the place of, the purchaser;

    I’m still not clear on how an owner would terminate this agreement if the buyer failed to perform and also refused to move, but seemingly this would be another risk for the buyer–they wouldn’t have the protections of the landlord tenant act as to things like repairs, etc. Presumably the contract would have to spell that out too.

  81. Craig,

    I too was surprised by “the party” that ensued. I wrote the post to enter into this week’s Carnival of Real Estate with a Sunday deadline (and won a Gold Medal in the Buttyfly Event as a result”. 🙂

    “It sounds like there would be a lease for an indefinite term equal to the closing period or, I guess, terminating upon buyer’s default under the PSA.”

    The lease would extend beyond the close date in the Purchase and Sale Agreement, which would be an “on or before” close date to actually close as soon as it ca. The lease would simply free the “tenant” who would become the owner, without penalty under the lease agreement for early termination of the lease.

    So the lease would end not at default of the PSA, it would end at the completion of the PSA. The “seller” would have to be happy with the idea that it could end up a simple lease agreement if there is a default on the PSA.

    I have several clients like this who are as happy to rent as to sell, as long as they can get money to help defray the holding costs. There are many sellers in this situation. That is why the “meeting of the minds” is so important. If the owner does not want to rent under any circumstances, only wants to sell, this method would not apply. If the the owner wants to rent OR sell, preferably sell, then this works.

    The defaulted or cancelled PSA would simply expire out and the lease would stay in place. That is why they need to be two separate stand alone agreements.

  82. Craig,

    I believe you will readily see why the tide shifted to purchase being the main event, and not the lease portion. Forms are more agent serving when they lean more heavily toward a sale culminating at the end, rather than a lease. When the owner doesn’t much care one way or the other, and many will “rent or sell” either, this makes more sense for the seller consumer than for the agent. Agents began using lease purchase to SELL. Owners used them to rent and sell or rent OR sell, being equally happy either way.

    From the buyer side of things, we meet many people who just don’t know how to put it all together to be a homeowner, who have been renting for many years. Every day I meet a single 40 something who needs the process of buying to be more of a transition than an “event”.

    It’s not for everyone, but there are many, many people for whom this type of help is the only way they will ever become homeowners. It truly is a win-win for all when it works well. And when it doesn’t work well, usually the only person damaged is the agent. I believe this is one of the reasons they were replaced with options that provided a higher possibility of the agent ending up with more than just a rental fee. I’m sure you can see the logic in that.

  83. Ardell — I can certainly appreciate why agents would not be too keen on this type of arrangement (although an attorney, who is not paid at closing, would be happy to help — or have I flogged that horse too much already? ;)) I can also appreciate that it would help some potential buyers to become actual buyers. My only concern is the complexity of the transaction and how to best protect my client (whether buyer or seller). With all due respect, I can see either the buyer or seller getting harmed if the deal failed. In fact, the agent is “damaged” only IF the deal goes south and causes some harm to the parties.

  84. Ardell wrote: “Forms are more agent serving when they lean more heavily toward a sale culminating at the end, rather than a lease. . . . . It truly is a win-win for all when it works well. And when it doesn’t work well, usually the only person damaged is the agent.”

    First, I’m not sure you could even get forms to do such a transaction, and if you could I really doubt you’d want to use them. I think this would require an attorney to draft something.

    Second, I continue to think you’re underestimating the risk of this type of transaction to the parties. It isn’t only the agent that would be harmed.

  85. Craig,

    The attorney in the room on these represents the agent/brokerage who is putting it together. The form that melds the two NWMLS agreements is one that can be done once and modified as needed. It becomes a Company Form, not a NWMLS form.

    Then even with that Company Form, they are never, ever done without attorney assistance. Never. There must be an attorney who reviews the final documents from the brokerage standpoint on each and every transaction. I usually put in a 5 business day attorney review period. This way the agent can put it all together as to detail the best they can, and the attorney can use that as an outline and modify to provide the appropriate legalese. Each transaction is slightly different, so attorney review of the specific documents is always needed.

    The parties are free to have their own attornies to review the documents drafted by the agent’s attorney, of course.

    Does that make more sense to you? It is the agent’s job to make sure the buyer and seller fully understand and are in agreement. It is not the agent’s job to perfect the contract. That is the attorney’s job.

  86. This thread reminds me of what I’d say shortly after switching from law to real estate, when people asked how I liked it.

    One of the comments I’d make was that it wasn’t all that different in that you were still dealing with clients, but rather than attorneys on the other side you’d have real estate agents. But then I’d note my biggest problem was that I would worry about all sorts of potential issues on every transaction–issues the typical agent wouldn’t even be aware of as possible problems. I’m now not as bad at worrying for a number of reasons, but I think one of them is that as an attorney you assume there might be a problem, where as an agent you assume the deal will go through and everyone will be happy. I’m now thinking more like an agent than when I started, but not so much that I think the transaction proposed here is a good idea.

  87. Kary,

    You are missing something. The forms for this USED to be on the shelf, and possibly are still on shelves somewhere in the Country. They were modified to what they are now.

    Same as the rate cap being pulled from the Finance Contingency. It used to be there, but sales fail when people have too much room to protect themselves.

    I’m not necessarily being critical here. It just is. If we used Board Forms instead of NWMLS forms like most of the Country, that would not likely be the case. In fact I will soon be in a position to correct that problem for my clients. But that’s another topic.

  88. I wouldn’t consider using out of state forms, or just outdated forms pulled off a shelf somewhere. I’ll agree with you on the quality of the NWMLS forms not necessarily being the best, but in most regards they’re adequate. But I’ve created as substitute for form 22 NFW, and looking at the NWMLS option form (form 75), I don’t think I’d ever use that.

  89. Pingback: There is no crying in real estate.  … | The Hotlist

  90. Ardell:

    Thanks for rewarding my request to take up this subject, and the comments are helpful. Sorry to be so late, but the weekend was crammed with family events!

    It seems that the loss of the accumulated down payment and a potential change in loan terms are the only significant risks to the buyer (at least risks that are not present for ALL buyers).

    Those risks can be mitigated with better agreements regarding the loss of downpayments that protect both buyer and seller interests adequately.

    Thanks again.

  91. Roger wrote: “It seems that the loss of the accumulated down payment and a potential change in loan terms are the only significant risks to the buyer (at least risks that are not present for ALL buyers).”

    I wouldn’t say that’s the only risk. As I mentioned in post 60, the time frame creates additional risk. And we haven’t even discussed things like the seller’s bankruptcy, death, foreclosure, etc.

  92. Kary:

    We agree they are not the only risks. The ones you mention seem plausible risks, but somewhat unlikely to occur.

    The other curious element of this is the length of time and level of scrutiny the buyer has to find fault with their purchase.

    I understand they have limited options to cancel the sale, but how many folks would keep the used car they bought after driving it for 12 months?

    Both buyer’s and seller’s remorse need to be accounted for and managed.

    It’s an interesting concept.

  93. Kary,

    Some major companies have company forms in addition to NWMLS forms. Also there are often BOARD forms available in other parts of the State of WA.

  94. To Kary, Roger and Craig,

    Remember, whether the buyer loses anything at all is the piece I have not outlined in this post because it is different for each transaction.

    If the seller is OK with renting and it is the buyer who hopes to buy, and the seller really is just trying to help them do that, then there might be NO forfeiture of funds at all.

    Please don’t assume “default” would have consequence. Most times it does not in these transactions.

  95. One thing to remember in all of this “bailout” is that many old methods will come back. Many old loan programs will come back.

    That you haven’t seen these things in this form because you haven’t been in the business since FHA was the loan of the day, doesn’t mean they are new and creative.

    Losing zero down and sub-prime means the means of buying and selling will go back to the way it used to be. This is just an old used to be that will get dusted off and polished up.

    Long closings happen every day somewhere. 30 day closings are really not in most people’s best interest.

  96. Ardell wrote: “Some major companies have company forms in addition to NWMLS forms.”

    I’ve reviewed some of them. Some are so bad it’s hard to believe they’re attorney drafted. And when you see similar language in forms from different companies, it sort of supports the fact that they probably aren’t.

  97. And some are very, very good and better. National companies have access to great forms, Kary. Don’t dismiss them out of hand.

    As to people dying in the middle of a contract, Roger, it happens. I’ve had it happen in regular transactions. We deal.

    I had that 100 year old seller not too long ago. Are you suggesting I should have rushed things because he might die? I didn’t. In fact it was one of my longer transactions because it took look to convey the information needed and make sure the seller’s attorney was in the loop.

    Rushing things is almost never the best answer, especially when things are complex. The more the potential problems, the slower you should go to make sure everyone is well informed of consequences.

    If someone hates the house after they live in it, isn’t it better for them to know before they buy it? “Date My House” is not necessarily a bad thing.

  98. Well, of course the unusual happens, it’s just that it is …unusual!

    And better is usually more better for one party than the other.

    Creative and complex solutions, instead of off the shelf cookie cutter solutions…ya gotta love em!

    Learn them, or leave!

  99. Complexity is not a good thing. Neither is ignoring risk.

    Also, I’d question whether an agent doing this without the assistance of an attorney (e.g. picking forms and filling them out) would be the unauthorized practice of law. The CULTUM v. HERITAGE HOUSE REALTORS case limited it’s decision as follows:

    “Our decision provides that a real estate broker or salesperson is permitted to complete simple printed standardized real estate forms, which forms must be approved by a lawyer, it being understood that these forms shall not be used for other than simple real estate transactions which arise in the usual course of the broker’s business and that such forms will be used only in connection with real estate transactions actually handled by such broker or salesperson as a broker or salesperson and then without charge for the simple service of completing the forms.”

    The word “simple” appears there twice, and I think it would be hard to describe this type of transaction as being simple. In fact, Roger just described it as complex.

  100. I’m pretty much in complete agreement with Kary on this issue. This is a complex legal transaction.

    As for the attorney refrenced by Ardell above, that person works for (and protects the interests of) ONLY the agent/broker. I think it would be nuts for a buyer or seller to enter into this arrangement without their own legal counsel. In fact, I think it might be a breach of an agent’s statutory duties to NOT recommend that a client seek counsel before entering into this transaction.

  101. The Culhum court sort of addressed the duty to seek counsel too:

    “In a few instances earnest money agreements may be complicated and one or both parties may realize the need for a lawyer to prepare the contract rather than use a standardized form. In fact, if a broker or salesperson believes there may be complicated legal issues involved, he or she should persuade the parties to seek legal advice. More often, however, these transactions are simple enough so that standardized forms will suffice and the parties will wish to avoid further delay or expense by using them. “

  102. Craig wrote: “As for the attorney refrenced by Ardell above, that person works for (and protects the interests of) ONLY the agent/broker.”

    Good point. Many of the amendments the NWMLS did to deal with distressed property laws were designed to protect the broker more than the agent. I’m not sure any of the changes were designed to protect either a buyer or a seller (except Form 22-NFW protects sellers too).

  103. Craig,

    You are correct. Many times I have had THREE attorneys at a closing. One representing me and one representing each of the parties. When something is very complex, but a good answer for both the buyer and the seller (and I have many and varied examples like a short sale or sale of home in a bankruptcy), you can’t have too many attorneys in the room.

    The banks often send attorneys as well.

    Still sometimes a Lease Purchase is very, very simple! Often the seller and buyer are related or close friends, and the seller is trying to help the serial renter become a homeowner. Often the parties are very, very friendly indeed.

    There are always a whole lot more monsters in the closet (that could “potentially” come out into the light) than actually come out ever. What ifs can make you nuts! What ifs are why God made Lawyers.

  104. Ardell wrote: “Still sometimes a Lease Purchase is very, very simple! Often the seller and buyer are related or close friends, and the seller is trying to help the serial renter become a homeowner. Often the parties are very, very friendly indeed.”

    I don’t think the buyer being a relative, friend, tenant, etc. has any bearing at all on whether or not the party needs representation, or whether the transaction is simple.

    Of course, that will be really convenient, however, once the lawsuit starts. They can all just be really friendly with each other while they blame the agent! 😀

  105. Ardell — God made lawyers because, every once in a while, a “what if…” becomes a “what now?” As in, “Holy cow! Our friendly, close friends are no longer friendly or close — or even our friends — and they think we’re screwing them, yet we’re stuck in this amorphous legal relationship without clear rights or obligations. Now what do we do?”

    I like your “monsters in the closet” analogy. Lawyers are paid to open the closet door, identify the monsters, and take REASONABLE steps to minimize the risk that those monsters will come out in the middle of the night. That’s called being an adult and being responsible. Keeping the door closed, not knowing exactly what is in the closet, and simply hoping that the monsters sleep through the night? Not so much…

  106. Kary,

    I’ve been in real estate for 18 plus years without incident. I have even practiced Dual Agency many times, without incident. I have fabulous clients and we often close shaking hands and giving gifts and wishing well and…

    The secret to good business practices is to have ethical clients of good character. That helps to keep the monsters in the closet.

    Tough things to tackle is not the same as monsters. Monsters come with evil intent. Hopefully you don’t really come across that as often as your fear it.

  107. Craig,

    I’m sure you haven’t had time to read the post and comments in detail…who does! But the missing piece in my sceanrio is the lawyer piece. I purposely did not detail the lawyer piece, and so people get the feeling that something is missing, and they are absolutely correct.

    The part that the lawyer does is not complex and can be standardized. I have refused to outline what that is…because…I’m not an attorney. That piece must be handled by an attorney.

    Lawyers are really not only for adversarial situations, Craig. Looking for someone to sue is not the type of lawyer that I have met in my life, that I love and respect and know well. Yes, some of my best friends are lawyers. They are very adult and do not need monsters to do a good business.

  108. Well I practiced law for 20 years without incident, and it wasn’t a result of ignoring problems or pretending things were more simple than what they were.

    In post 126 you claim the attorney work is not complex, but that you don’t know what it is. I’d agree with the latter.

    Earlier I stated this thing was academic because I doubted there were many people that didn’t have 3% down that could save in in 10 months. Add on to that the attorney fees for their representation, and this thing becomes more academic, because I don’t think that representation is going to be all that cheap. Something in excess of $2,000 wouldn’t surprise me. Ditto for the seller’s fees.

    I’d think doing this as a lease option would make a lot more sense. The legal issues would be significantly less. The only thing is if the value goes down the buyer wouldn’t want to perform. But in the lease purchase, they probably wouldn’t get financing if the value went down too far. So I don’t see much real difference.

  109. Ardell, I’m not sure why you brought up dual agency in post 125, but since you brought it up—as I recall, you seem to think that you can create dual agency by simply putting yourself down as a dual agent on the P&S form. I think that’s highly debatable, and clearly not good practice. If that happened under the current law, and my recollection is correct as to your belief, you’re lucky that the parties were satisfied after the sale–especially the seller.

    The thing about real estate, and liability, is that in 99.9% of the transactions, everyone is happy. The agent can screw up left and right and it doesn’t matter! Perhaps parties being happy will change if values decline significantly (just as mortgage fraud got “detected” more after prices stopped appreciating). But when people are no longer happy for whatever reason, when they see an attorney, that becomes the acid test of the transaction and the representation.

  110. Kary,

    I DO know what it is, I’m just not posting it here. I clearly will help people learn how to do what agents do. I never want to help people do what they should hire lawyers to do. That would be taking “transparency” to a dangerous place.

  111. Kary,

    You don’t have to see much real difference, as long as you know that there is a real difference and you just prefer to be blind to it. That is your “option”.

  112. Kary,

    I’ve been in this business in 5 states for over 18 years. I have practiced every form of agency that exists and has existed in this Country. I’ve been a sub-agent, a Buyer’s Agent, a Seller’s Agent, a Designated Agent, a Dual Agent and a Transaction Broker. As far as I know that covers all forms of agency…oh, and I have been a non-agent.

    I’ve done it all Kary. They each have their place and there are many places in this Country, CA for one, where avoiding Dual Agency is not possible.

    WA makes the instances of Dual Agency very infrequent and most times completely unnecessary. But that is not true everywhere and clearly has not been true for the last 18 years.

  113. Ardell wrote: “You don’t have to see much real difference, as long as you know that there is a real difference and you just prefer to be blind to it. That is your “option

  114. Kary,

    I’m not sure I know what you are talking about and I’m quite sure you don’t know what I’m talking about.

    It’s really pretty simple. Let’s say you own a house and it is tenant occupied. Now you are thinking maybe you want to sell it. You approach your tenants first and they are thrilled at the idea of staying and owning. They go to a lender and can qualify for an FHA loan but need $7,500. They have been renting for years and can never seem to save enough to buy.

    You say no problem. You qualify for the mortgage payment of $1900, so just pay the $1,900 and I’ll keep the rent and the attorney will hold the difference. Let’s draw up a PSA and keep the lease agreement that we have. Then when the monies collected are enough to go forward with the closing, you can own the house you are already living in.

    That’s a simple version. I know you can’t seem to fathom people who rent for 15 years because they just don’t know how to get it all together. You also can’t seem to fathom people who can’t get 3% of the sale price together on their own. But that is simply elitist thinking. There are many, many people who need many, many options and assistance and guidance in life.

    At least keep an open mind. I am not sure why you hate this idea. I am not sure why you want to make it more complex than it is. I’m not sure why you want to continue to attack me for writing this post. But I am sure that you are being a royal pain in the butt about it. Why? I do not know.

  115. What your missing is the added risk to the seller of having a buyer in possession under an earnest money. And the additional cost in attorney fees related to that and other issues.

    What your missing is the added risk to the buyer over just having an option to purchase, and the added costs to them in attorney fees.

    The only benefit that I think you’ve claimed to this over an option is that the buyer is locked in. But that’s illusory, assuming forfeiture of the moneys paid is the remedy.

    So an illusory benefit balanced against a lot more risk and a lot more in attorney fees. I just don’t see it.

  116. Kary,

    I’m not missing it. Sometimes Lease Purchase is best. Sometimes Lease with an Option to Buy is best. Let’s leave it at that and move on. You can’t see the value of the money being set aside for the downpayment. Trust me. The person who needs this method will see it and appreciate it as well.

    Lease with an option involves up front Option Fee as in Earnest Money. Not everyone has that. If you can’t see that, then move on.

    Lease Purchase is the alternative to zero down stacked costs. Lease with an Option to Buy IS NOT.

  117. Ardell wrote: “Lease with an option involves up front Option Fee as in Earnest Money. Not everyone has that. If you can’t see that, then move on.”

    There is no reason you couldn’t have an option to purchase be based on periodic payments, and that a portion of those payments be applied to the down payment. As a matter of fact, NWMLS Form 75 for some reason has an odd provision that allows all of the rent payments to be applied to the down payment or purchase price (which is a difference I can’t see–what’s it matter if it’s applied to the down payment or purchase price?????).

  118. #85 Ardell, I am in Salt Lake City and we don’t use attorneys. I can figure out a solution, I am still curious as to the title. How do you keep the seller from any additional encumbering? Can you record the lease purchase?

  119. #136 there is nothing wrong with two parties agreeing to allow all the rent to be applied to purchase price or down payment it is perfectly legal for two parties to agree to that.

    The problem comes when the third party usually a lender. They now have a say in what the terms are. If they don’t agree with the terms it doesn’t make the terms between the buyer and seller illegal, they will just take their ball and go home.

  120. Rob, as to 138 would depend on state law, but if the tenant was in possession it would be somewhat difficult for someone to claim they are without notice. “Inquiry notice” places them on notice of what the person in possession can tell them. But done right, it should be possible to record the contract. That would probably be a bit more straightforward with a straight option. The bigger problem is the possibility that they would default.

    As to 139, I wasn’t suggesting it would be illegal. It would just be odd to allow someone to live in the house basically rent free for the entire option period. I was trying to think if there was some sort of a thought to that, like allowing the renter to build up a down payment faster. Sort of a increase the price, but also increase the amount applied to the purchase, so that X% in met faster type of thing.

    As to my other comment, but perhaps the difference between applying it to the price and the down payment would be whether it’s forfeited if they don’t exercise. I don’t really see that, because Form 21 (Purchase and Sale) uses the term earnest money, not down payment, and in any case form 21 wouldn’t apply until the option was exercised (in the case of a lease/option). So I’m still not seeing the difference between applying the payments to the down payment or purchase price.

  121. Kary,

    My experience is I can get an attorney to do a reusable, fill in the blanks melding clause for $800. That cost would be paid from the real estate commission. The parties generally don’t get separate attorneys.

  122. You aren’t going to find a fill in the blanks type of thing for a lease/purchase. You would for a lease/option.

    And again, the conflicts between the buyer and seller are much greater with the lease/purchase than a lease/option, meaning they each should have an attorney.

    If your only reason to go with the lease/purchase was the belief you couldn’t set aside a down payment with a lease/option, then I’d suggest you reconsider lease options.

  123. Wow. What’s controversial about a lease/purchase? 141 comments…over a weekend!

    Good topic to address though, Ardell. It’s a great alternative for a transaction, given the right circumstances for both sides.

  124. Kary,

    Whether it should be a lease purchase or lease option is not something I “should consider” as in one for all and the other for neither. Each will apply in different situations.

    The difference is quite simple. A lease purchase is a BUYER who is leasing for a bit. A Lease with an Option to Buy (Lease Option) is a TENANT who may buy. It’s not my choice, it is the choice of the parties.

    1) If the owner ONLY wants a buyer, then Lease “Option” is simply NOT appropriate. If the owner is not granting the buyer the option to not be a buyer at all, then it is NOT a Lease Option as the paperwork would not reflect the true meeting of the minds.

    2) If the owner doesn’t care if it is rented or sold as long as it isn’t vacant, then it is the buyer/tenants choice to be a tenant as primary or a buyer as primary.

    The contract must suit the parties, and reflect the intent of the parties. Your repeatedly trying to convince me to only go one way, that being the one YOU prefer, is really to the point of being ludicrous. It ain’t our decision in the first place as we are not the parties in interest as agents. Whether the intent is to buy and only rent until that is possible, or the intent is to rent and possibly buy if it works out that way, is what it is. As long as the parties agree on that, then we choose the forms based on their agreement, not on YOUR preference.

  125. Kary said: “…you’re unlikely to find an attorney willing to…”

    Kary if you simply would say that YOU are unlikey to find…, rather than that I will unlikely find…, then we could stop arguing. Speak for yourself and not for me. I find whatever it is I am looking for. You may not have the same “luck” at finding what you are looking for as I do.

    I simply draft the whole thing on a form 34 “subject to attorney review” than the attorney modifies (or not) what I have drafted. It doesn’t cost much as I have given the attorney the meat of the issue and he just has to insert some legalese. It really is that simple…for me. YMMV

  126. Ardell wrote: “The contract must suit the parties, and reflect the intent of the parties. Your repeatedly trying to convince me to only go one way, that being the one YOU prefer, is really to the point of being ludicrous.”

    I’d agree, but it’s because you totally ignore the risks of your proposal You have two attorneys telling you that your proposal doesn’t work, and why it doesn’t work, and you completely ignore that.

    For example, as I’ve mentioned now repeatedly, with your option the buyer could still walk and leave behind the extra payment, as long as the P&S agreement merely provides for forfeiture of the earnest money. So there you haven’t obtained your goal. And to have the P&S agreement provide for election of remedies would be very risky, to the point of being absurd.

    It’s only if you ignore the FACT that they buyer will be able to walk on your transaction, or put them into an absurdly RISKY transaction, that your transaction is what you say it is.

    For ANY buyer and seller wishing to consider this, the far better route would be the lease with option to purchase.

  127. I love Chris Benis! He’s my favorite attorney in this area. Often agents have to put something together on Sunday night and the whole thing can be modified by attorney within 3-5 business days. Nothing wrong with that, Kary. It’s how the real world functions. You don’t waste an attorney’s time while the parties don’t know what they want yet. The agent does their job and the attorney does his job.

    The agent lays it out for the attorney after discussing it with the parties. The attorney represents the agent in completing the paperwork. Pretty simple stuff and done all the time AND the only way the system fuctions 24/7 and well.

    YMMV

  128. I like Chris Benis too. He helped me draft my version of Form 22-NFW. And I did pay for one client to see him regarding a condo resale certificate.

    But Chris being a nice guy and great attorney doesn’t mean you’re authorized to create complex documents, nor does it mean that he could possible represent both the buyer and seller in a transaction like this.

  129. Kary #148

    I’m not ignoring the facts ever, Kary. It’s a blog post, not a full tutorial. To some degree I do not put ALL details in a blog post, or it becomes a do it yourself tutorial. I choose not to do that as it is dangerous to the public at large for me to do that.

    Please understand there are gaps in info by intent because it is “a blog post” and not an outline of all factors involved.

  130. Ardell — I assume you tell your client that the attorney does not represent your client? And the attorney is only concerned about your client to the extent that the transaction may expose you to liability? And that, given the complexity of the transaction, your client should seriously consider their own lawyer? Anything short of that is, I believe, inconsistent with your duties as the agent.

    As for “monsters” — you took the analogy too far. I used the term to describe potential legal issues, NOT “bad” people. A good lawyer under these circumstances (i.e. a transactional lawyer who is involved in a transaction) identifies the potential legal issues and structures the deal to minimize the risk posed by those issues, while keeping in mind the goal of the client to actually consumate the deal. You never know whether or not another party is inclined to seek recovery or otherwise apportion blame, so a good lawyer proactively addresses issues that could be used by another party to the client’s detriment (e.g. get out of the contract, sue for damages, etc.).

    Now, once the deal goes south and a party suffers injury, then at that point the lawyer needs to start looking for a “monster” in your sense — a person who should bear the burden for the loss. That is why some lawyers are transactional, and some are litigation, and some — ahem — are capable of switching from one hat to the other. Different circumstances require different approaches from your legal counsel.

  131. Craig,

    That’s not really how it works. When you make the contract “subject to a 5 day attorney review period”, both parties and the agent can all separately consult different attorney’s during that five day period. I consult for my reasons and they for theirs. It’s a little different in that I have to add myself as one of the people who is permitted to make changes during and by the end of the period.

    Each party has the right to exercise the right to an attorney review during the attorney review period…or not. It’s pretty standard stuff in NYC and in that area and has been for almost 20 years.

  132. Ardell, it’s not the lack of detail, it’s the backpedaling to deal with issues that come up.

    For example, in the OP you clearly mention the buyer losing the earnest money. When it’s pointed out that losing the earnest money is the same as losing an option payment, you change it to election of remedies.

    For example, there are standard forms, then instead you use a blank form and have an attorney review it for you, then instead of just one attorney there are three attorneys.

    Also you’re completely missing some issues. For a seller, having a buyer in possession under an earnest money might be very problematic (I think Craig purposefully didn’t deal with that because I doubt there’s a clear answer). Not a problem with an option. Then there’s the risk factor to the buyer over the relatively short term nature of the transaction.

    The bottom line is you can’t point to one reason to not go the lease option route, other than the one that subjects the buyer to incredible risk (using an election of remedies in a lease purchase). Lease option has fewer legal issues, and the risks under a lease option are very easy to grasp. Your continuing to support a lease purchase mystifies me. Both obtain the same results, unless you place the buyer in an undesirable position.

  133. Ardell — c’mon, you are not “permitted to make changes” to a contract to which you are not a party. Moreover, I would be pretty surprised if the contract is contingent upon review by YOUR attorney, as you are not a party to the contract. Regardless, no changes to the contract are permitted without the specific consent of the parties. Otherwise, there is no contract as there is no mutual acceptance. That’s a basic legal principle.

    I note that you answered my question only by implication. It sounds like you do not inform your clients of the role being played by your attorney and the fact that they should have their own attorney review the contract/transaction as well.

    I can appreciate your “shoot from the hip” style. I’m sure you make a great agent in that you get deals “done.” Moreover, I’m sure you’ve avoided liability in part because of your great “people” skills. However, your style of practice creates risk — for both you and your clients.

  134. LOL You guys crack me up. I’m working on a listing. I’ll come back and see what you two think I can and can’t do, that I’ve been doing for over 18 years, later.

    Really, picture a world where all parties are reasonable and monsters rarely enter the room…that’s my world. You guys see too many monsters for me to fit that into any sense of reality. Might be a lawyer thing, but the lawyers I work with don’t do that. Maybe litigators do…but not most real estate attorneys, in my experience.

    You two make everything sound so monumentally difficult! Sheesh. It’s a simple transaction people. Get a grip!

  135. Ardell — no need to return to this thread, as it is officially a dead horse. That said, its also an excellent illustration of one of the differences between an agent and a lawyer — and one of the reasons why it may be worthwhile to pay for both.

  136. You still don’t even understand what the monster is! And claiming this is a simple transaction just means you don’t see the issues.

    I remember in the thread here on the Distressed Property law, you couldn’t see how it affected you. Not seeing issues doesn’t mean they don’t exist.

    Which reminds me of something. Back in law school, when I first started working in the bankruptcy area, my then girlfriend (also a law student) told me that practicing bankruptcy was like being in a boat. There could be whale size issues that you simply might not see. I really liked that analogy, and found it to be very true whenever I came across non-bankruptcy attorneys trying to practice in bankruptcy court.

    Well the same is true here. I’m going to change the analogy from monsters to whales, but just because you’re acting as an agent and the water seems calm, that doesn’t mean there isn’t a whale or two underneath you. And you might not ever even see it, but that doesn’t mean it wasn’t there.

  137. Craig, before you go, do you have a best case (e.g. no attorney on the other side) estimate what it would cost to draft:

    1. A lease/purchase for a buyer.
    2. A lease/option for a buyer (w/ P&S agreement also).
    3. A lease/purchase for a seller.
    4. A lease/option for a buyer (w/ P&S agreement also)..

    This would be the lowest likely cost, assuming there was no extensive revisions, etc. requested by the other side.

  138. Kary,

    If you don’t stop personally attacking me, I’m going to have to start deleting you. I don’t know what your problem is, but I simply do not choose to go whale watching with you. That does not mean I don’t believe in whales.

  139. What I’m saying is not intended as a personal attack. You have two attorneys telling you that your lease purchase is legally risky and problematic, and you’re just saying that you don’t see it. Pointing that out is not a personal attack.

  140. Kary — I handle a lease/option for a flat fee of $1195, regardless of whether it is buyer or selle that I represent. As for the lease/purchase, I would need to do some significant research and spend some time drafting it, at least for the first one. So, if you’re my first such client, I will bill you on an hourly basis. I would suspect that could get into the $2k realm.

    Also, “no attorney on the other side” does NOT equal “best case” in my mind, although it does equal “cheapest.”

  141. “You have two attorneys telling you…”

    1) I thought you were an agent speaking, which is it?

    2) I don’t care how many attorneys are telling me…if neither is “my” attorney of choice, then it is not legal advice.

    You can’t have it both ways. If this is legal advice, then you are both “attorneys”. If it is a blog post and not legal advice, then you are just two blog commenters in the room on my post 🙂

    I consider you an agent, Kary. If I am incorrect in that regard, please enlighten me.

    I make no distinction in blog comments between you and Craig and Biliruben. You are all individuals commenting on my post. My post being the keywords. Often Biliruben is the one whose opinion I value most, or Patent Guy.

    Are you suggesting that since Craig is an attorney and you “used to be” one (or are one – hard to tell from your last comment) that I should for some reason value your opinion more than Biliruben’s or my own?

    You seem to be angry that I value my opinion more than yours.

  142. Craig #165.

    Thanks for putting a dollar amount on it. That’s a good number. I didn’t think Kary’s $2,000 times two, was accurate. I appreciate the clarification.

  143. Ardell – you value the opinion of someone euphemistically named for the “reddish yellow water insoluable pigment found in blood and bile” over m? Ouch. That left a mark. 🙂

    You’re absolutely right, I am just a blogger (who is an attorney) and I am NOT dispensing legal advice. That said, when it comes to the weight to be accorded an opinion, the opiner’s education, experience, and reputation should all be taken into account. As an attorney licensed in the state of WA, I hope you would give my opinions a little more weight on issues relating to the law. Given that Kary was formerly a member of the WA Bar Association, I hope you would take that into account as well in weighing his opinion — regardless of his current position. Should you value our opinions more than your own? Of course not. But you should recognize that we have knowledge of the issue that you do not, notwithstanding the many years of experience. Working as an agent is NOT the same as being qualifed to practice law.

  144. Craig,

    Last I heard, neither of you have been real estate attorneys for 18 years. Like RE/MAX says (sometimes) “It’s the Experience!” LOL!!!

    It is true that since I started here on RCG back on 1/13/06 or so, that we have had this conflict. Russ and you vs. Kary at the time.

    No, I really don’t value anyone’s opinion more than others based on intitials after their name. I never did. I find some good and some not, same as any profession.

    I value the opinions of Biliruben and Patent Guy more, because I simply find them to be less self serving, and that for me makes their opinions of more value.

    Whenever someone is trying to beat me over the head because they feel they deserve to be recognized as a more valued opinion, the beating makes it harder for me to hear them (speaking of Kary here). When someone can’t simply post their opinion and then let go, and tries to shove it down my throat…it sometimes causes me to involuntarily gag.

    I truly mean no disrespect, but the only attorneys I ever work with are those who view me as a peer and don’t try to be more all knowing then I. The collaboration of my experience and their legal expertise then becomes of great value to our mutual client. That has been my experience.

    Those who can’t get their brain around “mutual client”…well, let’s just say they are few and not worth worrying about.

  145. Craig,

    I’m confused. Can you help me with this? Can someone be an attorney and a real estate agent at the same time? Are there “two attorneys” commenting here, or am I speaking to an attorney named Craig and a real estate agent named Kary?

    I thought I read somewhere that one had to choose one or the other. I could be wrong on that as I never had to make that choice myself.

  146. For the record, Ardell, I agree completely with the idea of a mutual client receiving professional services from two different professionals, each of whom adds value. I would not try to be more “all knowing” than an agent, but of course I would encourage the client to accept my opinion if it is within my area of expertise notwithstanding the agent’s experience.

    And with that — I’m out. I expect you and Kary to keep at it, though, until one of you loses consciousness.

  147. Just when I thought I was free — they pulled me back in…

    No thanks for editing my last comment, Ardell — I thought it was a lot funnier before. 🙁

    Mr. Krismer is an active member of the WA State Bar Association so he is an attorney. The Atty Rules of Professional Conduct restrict his ability to practice law in association with non-lawyers. However, I am unaware of any restriction on how he identifies himself.

  148. Thank you Craig,

    I will henceforth consider Kary to be an attorney/agent RCG reader/commenter and you an attorney RCG Frequent Contributor/reader/commenter. All readers and commenters being treated equally regardless of title. Thanks for the clarification.

    As to the edit…just trying to keep the personal attacks to a minimum for training purposes 🙂 I can’t ask Kary to refrain from personal attacks and not you. At least not on the same post. Fair is fair. But you are right, and Kim agrees, it was funnier.

    For those looking for the blog definitions, the person whose post it is manages the comment stream. So when I comment on Craig’s post, it’s his show. When Craig comments on my post, it’s my show. When I comment on Kary’s over at the PI RE Blog, it’s Kary’s show.

    Back to our regularly scheduled programming…

  149. Ardell wrote: “Thanks for putting a dollar amount on it. That’s a good number. I didn’t think Kary’s $2,000 times two, was accurate. I appreciate the clarification.”

    Ardell, I’d suggest you re-read what Craig wrote: “As for the lease/purchase, I would need to do some significant research and spend some time drafting it, at least for the first one. So, if you’re my first such client, I will bill you on an hourly basis. I would suspect that could get into the $2k realm.”

    That’s 2k for one side. The attorney on the other side will need to do completely different research, because the concerns are completely different.

  150. Ardell, I don’t understand why you consider it personal attacks.

    You never have accepted the concerns Craig and I have raised, but answer this. What would be wrong with:

    Lease with option to purchase.
    Lease and option provide that monthly payments will be set aside to be applied to the down payment, and forfeited if the option is not exercised.

    Craig would do that transaction for a flat fee, rather than an unknown fee possibly exceeding $2,000. Some other attorney probably the same for the other side. Both sides save money.

    The only difference I see is that the buyer could back out, but that would be the same with a lease purchase with forfeiture of earnest money. Lease/purchase with election of remedies would probably be not recommended by the buyer’s attorney.

    So what’s wrong with that?

  151. BTW, Ardell, just so you know, bankruptcy law involves a lot of real estate law. In fact, bankruptcy trustees often make their money when others make mistakes on real estate transactions, and in addition, bankruptcy trustees sell a fair amount of real property (or at least they did when I was practicing). It’s not like I’m unfamiliar with real estate law, but I was never a transactional attorney, like Craig. My role was to find the flaws in the work of others (similar to what Craig referred to earlier as a litigator).

  152. I have been known to both disagreee and agree with Ardell, Kary, and Craig over the years. Though they may see this as an overheated debate, I have found it educational and enlightening.

    I think that well reasoned arguments by opionionated professionals are a great reason to come back to RCG again and again.

    Thanks.

  153. “Ardell, I’d suggest you re-read what Craig wrote: “As for the lease/purchase, I would need to do some significant research and spend some time drafting it, at least for the first one. So, if you’re my first such client, I will bill you on an hourly basis. I would suspect that could get into the $2k realm.

  154. Thanks Geordie! I feel much better. Truth of the matter is I can probably google for the forms and find them in a heartbeat 🙂

  155. I really doubt you’d find an attorney who has done many lease purchase transactions, and even if they had, the client might have different questions than the prior client(s). Questions like: “What happens if the buyer files bankruptcy right before the sale is supposed to close?”

    Guess who Chris Benis would probably first call to find an answer to that one? 😉

  156. “I really doubt you’d find an attorney who has…”

    Kary,

    Let’s have a lesson in how to not be what you are. OK?

    That phrase should read: “I really doubt that I could find an attorney who has…”

    You can doubt yourself. Stop doubting me. That’s too personal since you don’t know me, and no one who does know me would doubt it for one second.

  157. Whatever. I’m sure there are a lot of attorneys out there who do very uncommon risky transactions all the time, when other more common, less risky transactions are available. I hope they have a lot of malpractice insurance.

    Stated differently, I was commenting on what experience attorneys are likely to have, not your ability to find things.

  158. Kary #184,

    I’ve had 3 meetings, 1signing, staged a listing, did a listing contract and took 40 photos that I am now processing…all during these 184 comments. Sorry if I’m a little backed up. In fact can you do me a favor? I don’t have the time at the moment. Can you count how many of these 185 comments came from you? I’d appreciate it. It would really ease my load if you would do that for me.

  159. Pingback: I Opened Pandora’s Box of Spam | Seattle Real Estate ~ Rain City Guide

  160. #140 response to 139. No intent in saying it was illegal. I hear a lot of folks say why can’t two people agree to something. They can but they forget the bank has a say and if the bank agreed it would be perfect.

    The overage can be considered earnest money that is non refundable, because it isn’t a down payment till it closes. Also it is not about exercising because there is nothing to exercise. The buyer either performs or default and would lose their EM.

  161. Yes. LOL! Just Kidding 🙂

    Kary, I’ve answered it so many times and in so many ways I just don’t know how to say it another time differently.

    You don’t get a magic wand that turns a buyer into a tenant. Lease Option is a tenant who has an “option” to purchase. Lease Purchase is a buyer with a long closing date.

    As an attorney, maybe you get to decide how to label someone. As an agent, we represent and assist people do what THEY want to do. If they want to buy, you dont have the option of converting them to a tenant who has an “option” to buy.

    It truly is that simple. Is your client a buyer or a tenant? Knowing the answer to that question will tell you which forms fit the situation and which don’t.

  162. Kary,

    I cannot let you change the topic of my post because it makes zero, zilch, nada sense for someone to enter into a Lease With an Option to Buy right now. None. Lease Purchase, yes. Lease Option, no.

  163. Kary,

    Here’s a current example.

    An agent came to me for some guidance. Her clients are selling a condo in X. They want to buy a home in Y due to a job change. When they first listed the condo in X, they listed it so that the net proceeds would equal the amount they need to complete the purchase in Y (no contract on any home in Y at present, just a listing in X.)

    Since they put these events into motion, they have had to reduce the price on the condo and it still isn’t sold. By the time it does sell, I guarantee you they will not have enough cash in hand to complete the purchase. That makes them “HOMELESS”.

    They are buyers. They do not want to rent. The only way for them to buy is with a lease purchase that accumulates the missing monies resulting from the reduced price on the condo sale.

    The are not Leasing with an Option to buy. They want to buy today, but must delay until the monies accumulated equal the amount needed. That is a Lease Purchase. They are entering into it KNOWING that prices are going down, but they want to match up their sale of a condo in X with the purchase of a home in y. They do not wish to deviate from their original objective. The declining market has created the need for a Lease Purchase vs. a straight out purchase.

    The seller of the home in Y is likely going to say yes, as long as we carefully identify the right seller. He can capture today’s price even though it can’t close as soon as he would like, and the liklihood of getting another ready, willing and almost able buyer instead of these buyers is slim to none.

    No seller or buyer in their right mind would get into a Lease With an Option to Buy right now, nor would I recommend that they do that. Lease With an Option to Buy just makes no sense in a down market for either party. So why would I as the professional in the room recommend it? I would not. Lease Purchase makes sense. Lease Option does not. It is not “terminology” and these two means of “tying up property” are not the same, nor are they interchangeable.

  164. 4 posts off of one question! 😉

    I don’t think you mentioned it, but in your example are your buyer clients going to offer election of remedies? If so, why would they do that in a declining market? If not, how is it different than a lease/option?

  165. Kary,

    Did my “4 posts off of one question” do ANY good? Are you seeing my point?

    As to your most recent question, they are not MY clients (see above)…they are another agent’s clients seeking advice from me. I am not adrressing the purchase details as I don’t think they will be able to sell that condo in Renton…PERIOD. But if they do, I’ll cross that bridge when we get to it.

    A lot depends on the sale price of the condo, so I can only advise one step at a time in a market that is changing weekly. A lot will depend on the properties available to purchase at the time of the sale. I clearly would not and do not recommend at this point that they enter into a contingent contract. Too many unknowns including market value of the property to be purchased at the time of the sale of the condo. Makes no sense to look at today’s price on the purchase, without a known price on the condo sale.

    I can’t imagine EVER recommending to a buyer anythng but “forfeiture of Earnest Monies” in a down market for a buyer client. For a seller client I would recommend the opposite in a down market. But as to the people in the specific case, frankly I personally think they are stuck in Renton and the odds of it happening at all are slim to none.

  166. “…how is it different than a lease/option?”

    If you ask me that ONE MORE TIME I am seriously going to come and find you and pop you in the eye!!! I am NOT going to answer that again!

  167. “pop you in the eye” — does that qualify as a personal attack? You guys are raising “Blogging Death Match” to whole new levels. I say you call a truce and give my in-box a break.

  168. Craig,

    Now don’t get jealous that you were never able to rile me up enough to offer to pop you in the eye 🙂

    As to your inbox, I never subscribe to other posts here. My inbox only gets emails on my posts.

    One of the reasons I edited your “fell exhausted on the keyboard” comment is because I’d jump up and drive over and pop him, before it came to passing out on the keyboard, so it was “misinformation” LOL!

    I did give it a break…but Kary wasn’t satisfied with my ignoring him for a couple of days. He was offended when he saw me commenting on other posts without having answered his #175. I’m more willing to pop him in the eye than to offend him.

  169. “it’s exactly the same as them having a lease option”

    LOL, now you’re just Cruisin’ for a Bruisin’.

    I’m am very sorry that you lack the capacity to “get it”, very sorry indeed. But the rest of the world is bored with the repitition. One more time.

    Client: “should I lease with an option to buy it at a later date?

    ARDELL: NO!!

    Client: Why?

    ARDELL: Because the market is going down and locking in a price today makes no sense whatsover. If you decide to buy it at some point in the future while you are renting it, we’ll cross that bridge when we come to it at the then market value, which I believe will be less than if you set the price today.

    That is the example of Lease/Option. The answer is NO! Don’t DO IT!!! as opposed to my Renton/Everett example above where the person wants to buy it (not lease it) but lacks some of the cash requirements, which is the subject of this post, Lease Purchase. They are not interchangeable scenarios. They ARE NOT THE SAME as I would recommend one and not the other, so they can’t be the same.

    May I respectfully request on behalf of most everyone in the U.S. that you drop this now? Or do I have to close it to comments to get you to stop bugging me to the point of distraction? Go write a counter-post on the PI. I promise to let you have the last word on YOUR post there. But you can’t change the message in my post to one that makes no sense whatsoever.

  170. Let’s just push it across to comment 200…

    And let me thank all of you in Seattle (hey it’s raining in Colorado just for y’all!) for this insanely educational discussion.

    I have at least three listings with no buyer love and revolving doors with renters jumping all over them. It appears after five months of no movement either way and with inventory 10% off of where it was this time last year that we are at bottom with a recovery coming in 2009. But in our land of no cash (we were trailblazers on the 100% financing) and really not so great wages, the no downpayment problem is the real reason so many people can’t buy and our sales unit traffic is 45% off of the 2005 peak. But with the perception among buyers, sellers and even our local paper now all kind of speaking the same language (namely, prices are what they are and will be here for a spell), this is extremely relevant fodder. A buyer wants to buy the place. They just need 200 to 300 days to do it. Bingo. We’ve had strong relocation into our area this year, but not many of them can buy because their prior residence “back home” is sitting with the 6 foot grass in the front yard. But they plan on buying as soon as they can here. This is discussed ALL THE TIME on rentals, because most of our 2008 renters didn’t aspire to be renters, they want to be owners. They’re just financially handcuffed. Everyone is interested in it.

    So for all the mundane details, the legal citations, the everything elses… THANK YOU from the real estate world. So many scenarios require illegalities, so many get in the way of deeds of trust, so many are just plain unethical, in some cases to the seller, but more often the buyer. Rare indeed is there an example of “here is how you do something in real estate… the right way” and after 199 previous comments, I think a consumer who doesn’t want to end up in trouble can find the right path here.

    Posted it to my blog as a resource for my clients. Thanks, again.

  171. Benjamin, Colorado law may be different in a number of respects–better or worse. What I would suggest is having attorneys drive the structure of the transaction, not the Realtors, not a clients. There are many ways to the same result and transactional real estate attorneys the the ones who are best able to minimize the risks.

  172. Thank you Benjamin. It would seem from your comment that the house back there that has to sell first, is where you would apply the lease purchase. The house in your area would be leased until the Lease Purchase on their out of state property reaches the closing table.

    In my experience the way I have been sucessful in the past in “must sell there to buy here” scenarios is to get involved in the sale back there.

    Sometimes I refer the listing and throw in the referral fee to the transaction on the out of state end. This way the price can be reduced or the repair items can be handled without the buyer or seller needing to agree. Most times I call the agent on the other end, and it being an agent to agent chat the agent tells me what they didn’t tell their seller client. This happens a lot. Then we fix the reason the house isn’t selling.

    The mistake most agents make is they just sit around asking their buyer client “did your house sell yet?” Get on the horn with the out of state agent who is the one trying to sell it. Maybe a little synergy will create the shot in the arm that propels it to SOLD.

    Again, thank you for your comments. It makes me feel like the poster child for WEB 2.0

  173. Pingback: Ardell put together a great post on leas … | The Hotlist

  174. Kary: Just so you know, I did read about all 200 of the comments. No, this is not an end-all, be-all discussion, but it covers the terrain magnificently. I would add many of your comments illuminate the subject matter as well. I personally am referring things over to attorneys when this is the consumer demand. But I really need to emphasize that I’m extremely grateful for someone like Ardell to 1.) write a first-rate post, 2.) be receptive to 200 some comments, some critical, some positive, and effectively moderate it all for five straight days (I lack that discipline!) and 3.) present so many viewpoints. The big deal here is that her initial post alerts consumers, agents and those in the profession: THERE IS A DEAL HERE. THERE ARE WAYS OF GETTING IT DONE. Then all the complimentary comments after really refine the right (and wrong) ways of getting it there.

    The CE I have taken basically says stay away from lease-purchases because there is so much legal gray area. But again, that CE is taught by attorneys. MAKE NO MISTAKE: I LOVE ATTORNEYS. I seriously do. But the problem is they say stay away. Are they the ones directly counseling the consumers? Are they the ones present when the deal needs to happen? I would agree with you that to really do it right, CYA with the ol’ barrister. But the really important thing Ardell did in the initial post and throughout the transaction was this: smell the deal. That is of service to the buyer and of service to the seller. The agent’s job is to smell out a solution, have enough knowledge on hand to describe what needs to happen, and then in my book, I turn it over to those actually allowed to practice law. But it I don’t smell it out, nothing happen. They’re not going to call the attorneys. If they do, their specialty is probably mineral rights, litigation or ambulance-chasing, not transactional real estate as you indicated.

    I have been scared into inaction on numerous occasions in CE classes where the goal is to get the agents to soil their shorts in fear. What ends up happening is that instead of thinking creatively, agents don’t think at all. I don’t know of any buyer or seller that wants their agent crippled in a ball on the floor hitting themselves over the head with crumpled CE notes screaming “it can’t be done, it can’t be done!” I speak from experience as the formerly crumpled ball of blubber on the floor.

    I have forwarded this chain to several of my clients and what it has done is get the ball rolling. It’s not a simple green light, yellow light, red light, this is a contingency-rich contract however you write it, and anytime there are abundant contingencies (whatever the state) the limited law-purposes afforded to real estate licensees puts them at risk to be practicing law and not real estate. But right now a contingency-rich contract is more appealing to a lot of sellers than the present offer they have: Jack Squat.

    The rules must be followed, it must be ethical, but in month 29 of a down market here in Colorado Springs, where only compelling-value homes are selling, this is stuff that combats market inertia.

    And for a consumer, they see 204 posts about a single subject and probably come away thinking:
    1.) You have to think creatively
    2.) You can get screwed, sued or stewed more likely than you can succeed.
    3.) This will probably cost me more than the last time I sold a house (because it might take 6 to 12 months for the deal to close, be locked in at a price that is 5 to 10% off of the peak, will need to be micromanaged so the money is not laundered, mishandled, lost or otherwise misused, will probably have several contract drafts taking me away from billable hours at my own profession, and then require a legal blessing from an attorney)
    4.) There are pros out there seeking to do their business better in an open forum. I sure as hell better choose a pro rather than someone who just spouts off and doesn’t know the difference between lease-option and lease-purchase.

    Any agent can do an easy deal. Some agents can do hard deals. Really good agents can do hard deals the right way. Just tracking a post like this makes me a better agent.

  175. Benjamin, the thing is, if the transaction had been structured as a lease/option I don’t think the four year fight in post 199 would have occurred. But that was a strange situation where the buyer did have to make improvements to the property. Perhaps it was that that swayed the court (they mentioned it a lot), perhaps it was the buyer acting as the owner, perhaps it was the buyer holding over and the seller not doing anything. It’s hard to say for sure. But the point is, I don’t think it’s a risk the average seller would want to take if they knew about the risk.

    All I know is I’ve always heard it’s a bad idea to let a buyer under an earnest money into possession prior to closing, even for one day. I knew that prior to becoming an agent (perhaps because of that case). I would never recommend it to a client, absent their having an attorney bless it. And in that case what I would tell my client is that I don’t recommend it, but that if they want to do it, they should see an attorney.

  176. Pingback: Week in Review: Treasury Secretary Henry Paulson announced plans Sunday to take control of troubled mortgage giants | 4realz.net

  177. Kary said: “But that was a strange situation where…”

    Lawyers LIVE to point out the one whacko situation where someone starts knocking down walls and pulling out toilets before he actually OWNS the house!

    The paper saying he can’t is not as good as my making sure everyone understands what they can and can’t do. Looking people in the eye and telling them usually has a better impact then simply including it on page 42 of Addendum Z line 88. You still need it in there. But it being in there doesn’t make the situation not happen, or even decrease the chances of it happening, as well as a firm and verbal “meeting of the minds” before anyone signs the paper.

  178. Kary,

    The “attorney blessing” won’t save you. You have to be a good reader of people and look for the God in their eyes, not the attorney’s blessing. It’s all about the people involved, not the paperwork.

  179. Ardell, did you even read my other piece and what happened to that poor buyer? As I said, I don’t think there were agents or attorneys involved in that one, but I really don’t think an agent looking in the buyer’s eyes would have prevented the sellers having their property tied up in litigation for 4 years. That’s rather naive really.

    BTW, my last post to Mack in that other thread said this, which could also apply to what you’ve written:

    Mack, just having done one [such transaction] before might not be the answer that should cause some relief. Having done ten before might not give that relief.

    The thing about real estate is 90%+ of the time, both the buyer and seller want the same result. They want the transaction to go through. And I’m not sure what the number is with financing right now, but I suspect it’s close to that number where they actually can perform.

    The legal issues only become apparent where one side doesn’t want to or can’t perform. In the case I discuss above, everything would have been great if the buyer could of performed (I’m assuming they couldn’t and that’s why they didn’t, but it might have been something else).

    The point is, in most transactions a real estate agent does there is no acid test of whether things were done right. A single transaction could have 5 flaws in the ernest money agreement each of which would make it unenforceable, but as long as both parties want to close and can close, the deal will close. That doesn’t mean it was done right.

  180. Kary,

    In the 18 plus years I have been in real estate there has always been a caution to agents based on a single case. Seems ludicrous to not base actions on the odds that 999 will be fine and 1 may have problems. Still attorneys seem to want to focus on the one case. I don’t know why that is.

    Benjamin said it all: “I have been scared into inaction on numerous occasions in Continuing Education classes where the goal is to get the agents to soil their shorts in fear. What ends up happening is that instead of thinking creatively, agents don’t think at all. I don’t know of any buyer or seller that wants their agent crippled in a ball on the floor hitting themselves over the head with crumpled CE notes screaming “it can’t be done, it can’t be done!

  181. Kary,

    By your logic, no seller should be allowed to stay past closing either…and we do that all the time. Why is pre-occupancy so much worse than post occupancy? I’m sure if you look hard enough you’ll find a case where post occupancy created a lawsuit as well. Still it is a fabulous tool for people in many cases that don’t go sour. Lease Purchase is the same…in reverse.

    Sure there are many, many agents who will not do a pre OR post occumancy EVER. But in my book that is putting the agent’s best interests ahead of the clients, and inappropriate to say NEVER regardless of the benefits to the parties in interest.

    What about the family who just closed on their sale on Friday, and are on the street, and the house they are buying is vacant but can’t close until Monday? Some agents will say NO and NEVER even if the seller says yes and the only piece missing is recording at the County on Monday. Some will say as long as your money is at escrow by end of day on Friday, we’ll work it out.

    You seem to be saying that you would NEVER be on the side of the “non-owner” being in the house for any period of time prior to ownership or past ownership. Maybe I’m wrong on that. Is it only buyers who can’t be in the property? Or sellers too?

  182. This pre/post occupancy issue deserves its own post, Ardell, since it’s strayed so far from your great lease/purchase discussion!

    Pre-closing occupany for a few days is something that in my experience does come up quite often. I think the problem — as logical as allowing your scenario seems (para 3 above) — is that there are many agents who have been burned on this, or have at least been in the office where there has been an issue. I personally won’t allow it on my listings or our personal sales any more without extremely onerous allowances (EM released to seller, large damage deposit, etc). It’s not 1/1000 when it can go bad and the buyer decides suddenly they don’t like the way the house creaks at night, or the closing doesn’t happen on Monday for whatever reason. I’d guess it’s more like 1/40.

    That said, I’ll often let them move personal property into the house/garage (with an addendum to the psa describing some conditions for this), without taking occupancy. Saves the second move for the homeless buyer (they can sleep at the Quality Inn for two nights) and at the same time eliminates the sky falling problem that Kary delineates about dealing with tenant/buyer in possession in the event of a failed close.

  183. Gordon,

    I absolutely agree with your last paragraph and do that most often as well. Yet I have had many agents refuse to introduce the idea to their seller client, just “on principle” without regard to the grave consequences to the buyer. I can’t tell you how many times I hear “I never let my seller do that.”

    A particular example of a vacant house and five young children sitting on the curb out front comes to mind. In that case it was the SELLER’S problem that delayed the closing. The County decided at the last minute that they wouldn’t give a Certificate of Occupancy to allow the closing to proceed without new curb cuts being poured prior to closing. The buyers wanted to put their stuff that was on a moving truck into the house and stay with relatives. The seller had an estimate of $1,350 to do the curbs. The seller wanted to fight the County and not put in the curbs.

    The other agent (Tony Rizzo) found someone to do the curbs within 24 hours at a cost of $500. We agreed to split it 4 ways at $125 each. The two agents and the buyer ended up splitting the cost of the curbs. The seller (who was my client) refused to pay even one quarter of the cost. I paid his share and my share.

    The point is that the agents need to look at all of the facts and be the professional in the room that looks at all factors and the people involved. Never say never. Consider the pros and cons and the risks vs. the benefits to the parties…not to the agent.

    At the end of the day the buyer and the seller deserve a professional who is advising based on THIS set of circumstances and then calling in the attorney (if needed) to draft a document to cover the peculiars of this situation. Not all transactions can be handled in boilerplate fashion and not all attorneys are being called on to over-ride the advices of the agent and the wishes of the parties.

    Sometimes you need a scribe…not a judge.

  184. “Ardell wrote: “In the 18 plus years I have been in real estate there has always been a caution to agents based on a single case. Seems ludicrous to not base actions on the odds that 999 will be fine and 1 may have problems. Still attorneys seem to want to focus on the one case. I don’t know why that is.”

    Because for your client they don’t give a rat’s ___ about the percentages if they’re that one. Sure for the agent if they do 999 and get sued on 1 they might make a profit overall. But for the seller it’s a completely different story.

    As to the square footage thing, that’s why the optional clauses form now has a clause to exclude square footage representations. It wasn’t that it was bad advice when you got it, it’s just that it’s now once again okay to reference square footage (assuming the right form is used).

  185. Ardell wrote: “By your logic, no seller should be allowed to stay past closing either…and we do that all the time. Why is pre-occupancy so much worse than post occupancy?”

    Because post-closing occupancy is a simple unlawful detainer action, similar to what a landlord goes through. It’s an expedited process, where limited issues can be raised.

    Apples and oranges.

  186. Ardell wrote: “The point is that the agents need to look at all of the facts and be the professional in the room that looks at all factors and the people involved. Never say never. Consider the pros and cons and the risks vs. the benefits to the parties…not to the agent.”

    That’s exactly why you don’t look at 999 cases, you only consider what might happen to your client. The client doesn’t care if you had 999 other transactions work, if theirs gets caught up in 4+ years of litigation.

  187. “…you only consider what might happen to your client.”

    True BUT!!!

    You don’t want to, using Benjamin’s words, leave your client “crippled in a ball on the floor hitting themselves over the head with crumpled (attorney) notes screaming “it can’t be done, it can’t be done!

  188. The manual for the statewide forms has this warning on using a pre-close occupancy agreement:

    A. Pre-Closing Occupancy is Risky. NWMLS recommends that Sellers do NOT give Buyers a right to occupy the Property prior to closing. However, if your Seller wishes to do so, then use this form [65A].

    B. Purpose. Under current Washington law, there is a substantial risk that a Buyer who occupies the property in connection with a pending Purchase and Sale Agreement is not subject to the Landlord-Tenant Act; therefore, if the purchase fails to close the Seller may have to file a lawsuit in order to recover the Property from the Buery, a process that could take more than 18 months. The purpose of this Rental Agreement is to make the rental subject to the summary eviction proceedings (unlawful detainer) of the Residential Landlord Tenant Act. Although this form attempts to minimize that risk, there can be no certainty that a court will interpret this form to allow the Seller to use the unlawful detainer process. Sellers are therefore urged to consult a lawyer before entering into a pre-closing Rental Agreement with a Buyer.

    There is a lot of that which is emphasized, to emphasize the risk.

  189. Conversely,

    I have had clients who wanted to move in before closing. They asked if they could paint before closing. I said no. They asked if they could do other things to the house before closing. I said no. They kept asking why not.

    I refused to propose to the seller that the seller let them move in before closing because they obviously didn’t “get it”. That’s what I mean by THIS transaction and THESE people. We evaluate people for a living. It’s part of our toolkit. We need to know our clients well enough to know what makes sense and what doesn’t. We are not order takes who simply do what they ask us to do, nor are we robots programmed to “Just Say NO!”

    I had no problem telling that client that I didn’t trust them to live in the house and not DO stuff to it. Their response? “You’re right Ardell, we wouldn’t be able to exercise that amount of self control.” We found a different answer that suited all parties.

  190. Kary’s #221 and yet…there is a form for it…no?

    What many people are asking me Kary, and I can’t answer, is why if this is about Lease Purchase vs. Lease Option you brought out the case of horrors involving a buyer in the house prior to closing. Isn’t the buyer in the house in both cases? How would your method prevent a buyer from doing those things and tying up the seller in litigation? How would Lease with an Option to Buy prevent that from happening? How would it take the hammer and nails out of the occupant’s hands?

  191. P.S. It is a misnomer that an owner can’t sell a property during litigation or possible litigation. I have done it. Often sellers are scared into not keeping Earnest Money for fear “it will tie up the property” and the object is, of course, to sell it.

    I have sold a property of my own without releasing the Earnest Money from a previous buyer. It can be done.

  192. Ardell wrote: “What many people are asking me Kary, and I can’t answer, is why if this is about Lease Purchase vs. Lease Option you brought out the case of horrors involving a buyer in the house prior to closing. Isn’t the buyer in the house in both cases? How would your method prevent a buyer from doing those things and tying up the seller in litigation? How would Lease with an Option to Buy prevent that from happening?”

    That gets to what I’ve been explaining over and over. Holding under a purchase and sale is unusual, and there’s at least one case that says that isn’t covered under an unlawful detainer. As far as I know (and something a practicing attorney would need to confirm), there’s no such case law with a lease and an option to purchase. Also, in other contexts, an option would be much better for the seller–e.g. bankruptcy of the buyer. The bankruptcy might extend the option slightly, but you wouldn’t be off in never-never land.

  193. Ardell wrote: “P.S. It is a misnomer that an owner can’t sell a property during litigation or possible litigation. I have done it. Often sellers are scared into not keeping Earnest Money for fear “it will tie up the property

  194. BTW, I should add if the suit is only over earnest money, it wouldn’t tie up the property. It would have to be a suit over claim of ownership of the land, or a lien against the land, or some other thing affecting the land.

  195. Kary,

    #225 – Still much better if the person who doesn’t own the property doesn’t start altering it PERIOD. That’s where my chips fall.

    #226 – you answered it for me in your #227 Most times disputes are about Earnest Money and sellers are taught to let go in fear of “tying up the property”. They should let go if they are wrong and hold on if they are right.

    There is right and wrong in real estate.

  196. I suspect an attorney would have issues if you went to them and said: “This is what we want to do. The buyer will buy in one year and rather than an option payment per se, they’ll just improve the property.” The attorney might respond by suggesting a payment and then having the owner improve the property at some point in time.

    Which sort of gets back to my original point. Rather than going to the attorney to say how you want to structure the transaction (e.g. lease purchase), go to the attorney specifying what you want to do (tie up the property for X months, during which time the buyer will accumulate funds for a down payment and then buy the property for X dollars). Specify what you want to accomplish, and let the attorney determine the best way to do that (with them understanding that whatever they proposed would also need to be acceptable to the other party’s attorney).

  197. ???????????????????????????????????????????????????

    I think YOU have to stop using the word “you” as referring to me. This makes no sense whatsoever. Maybe it’s Saturday night too much wine night at the Krismer house.

    You said “I suspect an attorney would have issues if you went to them and said: “This is what we want to do. The buyer will buy in one year and rather than an option payment per se, they’ll just improve the property.

  198. I was actually agreeing with what you said in the first paragraph of #228. Substitute “someone” for “you” if you like. I was not trying to suggest you would or should do anything. I was trying to get at what an attorney would think, not what you in particular would do.

    In the nightmare case one of the elements for some reason was improving the property. That was a benefit for the buyer because they were living there, and was probably thought to be a benefit for the seller if the deal didn’t go through, because they would have end up with a better piece of property. I could see why someone might want to structure a deal with someone that way, but I think an attorney would have some difficulty with that. I was then suggesting a possible alternative that an attorney might find acceptable that accomplishes what the parties want.

  199. Turn on your agent brain for a sec. Legally they are both options, of course. But in a buyer’s market, that also happens to be a down market, it makes no sense whatsoever for a buyer to enter into a lease with an option to purchase at a later date at present value.

    It’s OK for an agent to have his/her background from their previous career be in the law. But agents have to give advices based on market conditions, and from the perspective of current market conditions (vs. merely legal possibilities) Lease Option makes NO sense for a buyer. That’s how it becomes NOT advisable. Not based on legal principles, but based on agent advices that hinge more on current market conditions and future value expectations.

    Recommending Lease Option might be OK for an attorney. But in this market for an agent to recommend it would border on negligence of duty. That’s why you have to decide if you are an agent or an attorney. If you are a “retired attorney” and a practicing agent, as I believe you are, then you have to start leaning toward what an agent should do vs. what a lawyer might do.

  200. I really don’t get it. Buyer A does a lease option. The market is going to be just as much down (or up or flat) in that scenario as if they did a lease purchase. They’d end up in the same place. So if a lease option doesn’t make sense for the buyer, because the market is going to go down, why would a lease purchase make any more sense?

    And I really don’t get your last paragraph. Both agents and attorneys represent their clients’ interests. I don’t see why an agent would push a client toward a lease purchase, especially if that agent thinks that a lease option doesn’t make sense because the market is headed down. Both the attorney and the agent should help the client reach their goal (home ownership by a certain date) with the least risk as possible to accomplish that goal, or at least an amount of risk that is acceptable to the client. You almost make it sound like an agent should push a client into a risky transaction, and would somehow be negligent for not doing so. I’m pretty certain that’s not what you’re saying, but whatever you’re saying isn’t clear at all.

  201. Kary’s comment #235

    “I really don’t get it.”

    That should make Dustin’s Hotlist on 4Realz as “The Understatement of the Week in Review” 🙂

    “Buyer A does a lease option.”

    Incorrect. If it is a Lease Purchase then A is a Buyer. If it is a Lease Option than A is a Tenant.

    Buyers buy at today’s price (think “on lay away”). No one buys an option when they know the option price is high, because the market is going down. They rent…PERIOD! Otherwise they become the butt of the saying “A fool and his money are soon parted”.

    Some WILL buy a house today…but no one is going to buy an option today, at today’s fair market value as the set price of the option, nor would any professional recommend that they do that. It’s just bad advice, not illegal. It’s not a matter of law, it’s a matter of savvy advice or stupid advice.

    A Lease Purchase is a means by which a buyer buys and a seller sells. If the buyer isn’t a buyer, then the seller is being defrauded. If the seller goes to an attorney for a Lease Purchase Agreement and walks out with a Lease Option Agreement, the lawyer should be sued for malpractice. The seller asked for a Purchase Agreement, not a Lease with an Option to Buy! God, how many times can I hope to explain this before you “get it”!!!

    If I go to a car dealer and tell him to write up the Corvette, he can’t write up the hybrid because he thinks I should buy it! Jesus, Mary and Joseph give me strength!

  202. How many times do I have to explain to you that unless you have an election of remedies provision for the seller to take advantage of (which you don’t seem to like if you’re representing the buyer), that the situation is exactly the same with a lease purchase as a lease option?

    You seem to be really stuck on form over substance. With a lease purchase having a forefeiture of earnest money remedy, the “buyer” would be just as likely to default with a lease purchase as with a lease option.

    BTW, I don’t agree with your representation as only one of the two situations having what would be considered a buyer, but that’s really the important distinction as to why the courts have a different procedure for buyers in possession under an earnest money. It’s not that much different than the old style real estate contracts, where if the buyer performs the seller eventually gives a deed. I thought in post #4 that the court would require a judicial foreclosure, but apparently it merely ejectment. In the context of a real option to purchase (as opposed to something disguised as an option) you don’t have that. You just have someone who may elect to become the owner.

    I’m not sure why you even started up this discussion again. I thought you were sick of it? But anyway, to the extent you are advising another agent, I hope you (and here I am speaking specifically to you) are advising them that they should be advising both the buyer and seller to get independent advice from an attorney that represent each of them. Don’t heed my advice at your own peril. At this point I’ve tried enough to educate you on the subject and simply give up. You’re apparently incapable of understanding the risks.

  203. “I’m not sure why you even started up this discussion again.”

    Here’s how blogging works, Kary. I have clients who are following this discussion. My clients think that I agree with your last comment if I don’t answer it and correct it. So the only way for this to end is for you to STHU.

    I have to answer your last comment. If you truly want this to end, then you have to stop commenting. As I said before, you can write all the posts you WANT on Lease Option on the PI. In fact I even suggested that Dustin let you write it as a guest post here on RCG. You can have the last word on your post. But if I let you have the last word on my post, then that is the same as ME giving bad advice by not correcting your bad advice. Can you “get” that?

  204. Forget the freakin’ law, Kary. Here’s how it works in the real world of real estate and real estate agents.

    Agent: Do you want to sell your house?

    Owner: Yes

    Agent: If it doesn’t sell do you want to rent it?

    Owner: NO!

    Agent: Would you consider a buyer who needs to do a Lease Purchase, if I can figure out a way for it to close in six to 10 months?

    Owner: Yes, if that’s the best I can hope for.

    IT IS NOT A RENTAL PROPERTY! IT IS FOR SALE! IT IS NOT “FOR RENT!” Someone can lease it as a condition of PURCHASE. They cannot RENT it with an “option to buy it”. That option is not on the table! The buyer can’t “buy an option to buy the house” cause it ain’t an option!

    Jiminy Cricket! Yes, I want the attorney to make sure all of the protective clauses are in the contract. I DO NOT want him to turn a Purchase and Sale Agreement into an Option to Buy.

  205. Here’s another real life example of how this really happens for the benefit of readers who may still be confused by the banter.

    1) Owner Joe comes to me and says, “I want to sell my rental property.” Owner Joe and I establish an asking price of $250,000.

    2) Owner Joe goes to tenant and gives them notice to vacate.

    3) Tenant Bob says, “Can I buy it? I really don’t want to leave and I will buy it if I can get a mortgage.”

    4) Owner Joe calls me and says Tenant wants to buy it if he can do so.

    5) I call Rhonda and she does a pre-Approval for Tenant Bob.

    6) Rhonda says they qualify except they need $3,000 more dollars than they have at present.

    7) I talk to owner Joe and tell him he has to spend some money to get it ready for sale and he will lose rent in the process of selling. So let’s do the Lease Purchase until the $3,000 is on the table as outlined in the above example. $770 times 4 months equals a Purchase and Sale Agreement with a 120 day close. We don’t need a lease agreement because the tenant is already “in place”. We just need the attorney drafted agreement for the buyer to pay $770 more each month to be placed in a “downpayment collection account”.

    8) In 120 days the tenant buys the property when escrow closes on the 120 day Purchase and Sale Agreement.

    That is an effective Lease Purchase scenario in its simplest form.

    It doesn’t work with Lease Opton.

    Buyer comes to me and says, “Should I buy an Option for $3,000 that I forfeit if I don’t buy within 4 months?” I answer no. If you have the option to rent or buy, then just rent it. When you have your pre-approval in place, we will go look at some other places and see if where you are currently renting is the best deal or not. At best you might pay a tad more for staying where you are, but chances are we can find a better place for less money.

    They can’t be “the same” if my advice is different.

  206. Oh—I’d love to read all these comments here…but….it’s a “life-expectancy” sort of thing.

    I have found that attorneys who do their job by mitigating risks for their clients can’t comprehend that risks are inherent in ALL deals and NOT every scenario can be addressed to the satisfaction of everyone involved without realizing that some risk, is indeed, involved. Once everyone understands it—things move forward, or not.

    Here, in Miami, I just did a very complicated, sophisticated $6.8M sale in which my seller-client took a large risk by taking the property off the market for 4 months; the buyer had the ability to walk up until 30 days prior to closing. It closed.

    Moral of this story: that’s all we had on our plate; we worked with it, did what we could and hoped for the best. Sometimes our gut instinct about everyone “moving forward in good faith,” is an intangible that can’t be worked out on paper.

  207. Ardell wrote: “And that’s where the person who has known the people longer than a 1 hour legal consult has the advantage.”

    So let’s see, a real estate agent, with no legal training at all, who represents the seller and has NEVER MET the buyer is in a better position to assess risk because they know their seller? The seller doesn’t need to worry about the seller suing. They need to worry about the buyer suing. I don’t see how any agent is in any position to assess the prospects of that even if the buyer was completely unrepresented and the agent had extensive contact with them.

  208. “Ardell, I have news for you. The last one to post doesn’t determine the one that’s right. That’s a rather absurd reason to have started this up again.”

    No one is right, Kary. You are right for your clients and I am right for my clients. Did you really think one of us was absolutely right?

    What I have learned is that my clients assume that I acquiesced to your viewpoint if I do not respond to the contrary. It may be absurd to you, but it is how my clients view things, and of course they ARE right. So the more you talk, the more you make me work.

  209. Kary said: “I don’t see how any agent is in any position to assess the prospects of that even if the buyer was completely unrepresented and the agent had extensive contact with them.”

    Kevin said: ” Sometimes our gut instinct about everyone “moving forward in good faith,

  210. In my experience, Kary, if you expect the worst from people…that’s what you get. When they know your reputation could be ruined if they screw up and don’t do what they promised, they honor their promises, iin my experience. YMMV. Mutual respect is very important in this business.

  211. “So let’s see, a real estate agent, with no legal training at all…”

    You’re not suggesting that someone having “legal training” makes them a better agent ipso facto, are you?

  212. Shoot Kev, I have to go show three houses just when the refeshments hit the thread!

    My clients voted comment #42 Item 6) the funniest in the comment stream 🙂 My personal favorite is Comment #204

    This is an excerpt of one of my favorite parts, but I like the whole comment “…I have been scared into inaction on numerous occasions in CE classes where the goal is to get the agents to soil their shorts in fear. What ends up happening is that instead of thinking creatively, agents don’t think at all. I don’t know of any buyer or seller that wants their agent crippled in a ball on the floor hitting themselves over the head with crumpled CE notes screaming “it can’t be done, it can’t be done!

  213. Ardell wrote: “No one is right, Kary. You are right for your clients and I am right for my clients. Did you really think one of us was absolutely right?”

    No, but one of us is the one least likely to get our clients into serious trouble. One of us is more likely not to be sued by our clients (along with our broker) as a third party defendant. One of use is the one most likely not to be sued for consumer protection act violations that might not be covered by our firms malpractice insurance.

  214. I hear the Seahawks lost. Dang. But, the views of the Cascade Mtn Range from 7000 ft just above Sunrise Lodge at Mt. Rainier were phenomenal today! Everyone should take a break from blogging and get out to enjoy this wonderful weather.

  215. Kary,

    After you have been in the business another 15 plus years and have not had any suits for as long as I have not…we’ll talk. I am clearly not more likely to get sued than you…or I would have been by now.

  216. Tim,

    Why am I remembering Paul Bachetti who used to stick his hand in my uniform pocket every day, break my comb in half and sneak it back in…because he liked me 🙂

    I’ll see if I can turn out the lights on this thing.

Comments are closed.