'Lease purchase' as a way to buy your next home

In the past few years, many Atlantans lost their homes to foreclosure, yet still need a place to live. If your credit has been ruined, but you still can afford to pay rent, consider looking for a "lease purchase" opportunity. It might be just right for you!

A "lease-option" is nothing more than a lease agreement that gives the renter the right, but not the duty, to purchase the property under certain terms in the future. Some people call it RENT TO OWN.  It should be a win-win document.

Here are the questions to ask:

1.  Is there an up-front fee of any kind, and is it refundable?

We're all familiar with a security deposit, which is a payment designed to protect the owner from damage beyond normal wear and tear. Return the property in clean condition and you should get your security deposit refunded.

But with a lease purchase agreement, the landlord may ask for an option, and it may cost several thousand dollars.  

You should ask these questions: Is it refundable, and if so, under what exact circumstances?  Does it apply to the purchase price if you decide to buy, and if you decide not to buy, who gets that money?

2.  What is the term of the option?

If you are seeking a lease-purchase because your credit has been damaged, you should meet with a reputable lender and talk about how long it will likely take to clean up your credit and come to a position where you might realistically be qualified for an FHA loan.

Depending on your situation, it might take up to 36 months. You want your option to last at least as long as you think you will need.

3.  Is the rent competitive?

Remember, there’s no such thing as the last rental house, so you can afford to be a little picky.  You should not have to agree to pay any more than market rent for the right to buy the house in the future.  To determine fair market rent, you'll need to shop and compare available rentals in the area you want to live. If a landlord offers a lease-purchase but it is priced too high, don't be afraid to negotiate.  

4.  Does a portion of the rent apply toward the purchase?

If so, how much? And where will that money be kept until you decide if you are going to purchase or not? In a perfect world, we'd love to see the owner putting the up front fee and the monthly option fee into an escrow-trust account. But your owner may have different ideas. This is another area where your attorney can give you some guidance.

5.  What will the selling price be?

In Georgia, an option agreement must state what the price will be or must describe how the price might be easily determined. In a world of rising real estate prices, a renter would love to lock in prices now and buy three years later.  In a world of falling prices, just the opposite. Perhaps the most fair way to set a price is for each side to hire an appraiser when you are ready to buy and split the difference between the estimations. No one has a crystal ball, especially in this market.

6.  Take good care of your property

Most lease purchase agreements make reference to the fact that the renter must not be late with any rental payments of the option may be canceled by the owner. If you are serious about buying the house, treat it like it was your own. Be prepared to handle minor repairs on your own. This demonstrates to both seller and lender that you are ready to once again own your home.

7.  If you decide to not buy, just walk away!

In the process of living in the house for a number of years, you may decide that the house just isn't right for you and your family. Maybe your situation has changed - kids are now off at college or maybe you need more bedrooms. In any case, you should be able to just walk away at the end of your lease with no penalty. Make sure that is in writing.

8.  If you decide to buy, who pays for closing costs?

Remember that many sellers today agree to pay closing costs as an inducement to purchase. Make sure your option agreement spells out who is responsible for what costs associated with the closing. Ask your lender to estimate now the typical costs of a new loan, and include them in your negotiations.

9.  Have the option document reviewed by a real estate attorney

In a Lease Purchase agreement, there are many decisions that need to be made in advance, and your real estate attorney is the best person to review these decisions with you.  Make sure you do this before you sign anything. After you sign on the dotted line, it's too late to make a change in the lease.