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.