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Lease Purchase: Another Key To Selling Real Estate In A Credit Crunched Market
This article is part of the series: "The Key To Selling Real Estate In A Credit Crunched Market: Financing...Financing...Financing.
You have tried to sell your home in the traditional way. It's not selling. Your agent has suggested lowering your price again, but you have gotten to your limit.
Don't lower your price, sell by "lease purchase". For simplicity, I will use the term "Lease Purchase". "Lease option", or "Rent To Own" are often terms used for the same transaction. The term can mean a difference in the commitment to purchase, or can just be the more familiar term in a certain area.
If you have money saved for the down payment for a new home in addition to the equity in your present home, this will work for you. If for some reason you don't need your equity right now, this will work for you. Situations where you don't need your equity right away, are planning to rent for a while until you find exactly what you want to buy, or purchasing your new home by lease purchase, therefore giving you time before you need all your equity.
The basics of selling on a "lease purchase".
You have tried to sell your home in the traditional way. It's not selling. Your agent has suggested lowering your price again, but you have gotten to your limit.
Don't lower your price, sell by "lease purchase". For simplicity, I will use the term "Lease Purchase". "Lease option", or "Rent To Own" are often terms used for the same transaction. The term can mean a difference in the commitment to purchase, or can just be the more familiar term in a certain area.
If you have money saved for the down payment for a new home in addition to the equity in your present home, this will work for you. If for some reason you don't need your equity right now, this will work for you. Situations where you don't need your equity right away, are planning to rent for a while until you find exactly what you want to buy, or purchasing your new home by lease purchase, therefore giving you time before you need all your equity.
The basics of selling on a "lease purchase".
- Price the property at market value, not lower. Use area comparables. Foreclosures should be excluded. You may also get an appraisal. Be sure to tell the appraiser that the price should reflect financing by lease purchase. Your home is worth more with this flexibility in financing.
- For a lease purchase, a percentage is added onto the price. For a property in a very desirable area, that percentage of the increase should be 10% of the property value. You can make it lower according to the location, and desirability of the property. This is not market appreciation, but the value of the lease purchase. This is called the strike price. If it is too high at the end of the option period according to what it can be appraised for, the price can be adjusted lower at that time.
- Determine the amount required to hold the option on purchasing. This amount will go to the down payment "if or when" the tenant buyer purchases by paying off the amount it was purchased at. Lenders will probably require 5 to 10% down plus closing costs, when the tenant buyer gets financing. Sometimes less is needed, and sometimes the tenant buyer can get re financed instead of a regular buyer mortgage. But in view of credit standards tightening, count on the tenant buyer needing more, rather than less in down payment. Joshua Heuman, a mortgage specialist with R. Harris Financial, is a good mortgage broker to contact to help your client and you know what they will need to qualify for a loan. Keep as a backup for the property at least three months of payments, in case you have a period of time you are not collecting monthly rent.
- Determine the monthly payment, or rent payment that will be paid. Be sure taxes, insurance, principle and interest, and any owner fees, (such as association dues), are included. The monthly payment made by the tenant/buyer should be higher than the total of the preceding if possible. A monthly credit can be given towards the down payment. This is only done by figuring the credit. Not by actually handing over cash. Receiving that credit depends on them buying the home. Also, it can be tied into on time monthly payments. Credit is given if on time, not given if not on time.
- Advertise the home, stressing the lease purchase opportunity. You may advertise the amount of cash needed to hold the option, the monthly payments, and the price. A lease option buyer will be most concerned about the amount to be paid up front, and the monthly amount.
I wanted to let you know that I am enjoying your posts. Thanks for sharing your knowledge here. I am sure I will return many times.
Blessings,
Maria
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