One of the benefits to selling your property by using lease purchase financing is being able to eliminate the responsibility of paying a mortgage rather than waiting for your property to sell, which will depend greatly on market conditions in the area where the property is located and its value. Some homeowners have been fortunate enough to see their home’s value increase allowing them to sell their property without the need to short sale it. However, this is not the case for all properties and many will need more time for the value to increase. Although the short sale process is easier and more streamlined, it still has to be approved by your mortgage company. Even though lenders are now allowing owners who are not behind in their mortgage to apply for a short sale, preference is still given to those experiencing financial hardships. If you are not behind in your payments it can take awhile and there is no guarantee it will be approved, it really depends on the property and the lender (this does not mean you should not try). If you have already been turned down by your mortgage company and still need to sell, a lease purchase can be an alternative solution. It allows you more time for the property’s value to increase while offsetting your mortgage expenses in addition to having a potential buyer already in place.
Although current reports and news stories claim it is a seller’s market this is not entirely true. One of the reasons (among several) this has happened is in February of 2012, the state attorney general in 49 states and the federal government reached a historic settlement of $25 billion with five of the nation’s largest mortgage servicers, which set new standards for the servicing of loans, particularly loans in foreclosure. In early 2013, federal regulators also announced a $9.3 billion settlement with 13 banks over robo-signings and other abuses regarding foreclosures. These series of events caused a significant drop in the number of foreclosures on the market and created a severe shortage of properties and a “so-called” seller’s market. Even though “The National Mortgage Settlement” has caused an increase in what buyers are paying for properties due to the shortage of inventory, the same problems exist for many homeowners who need to sell for various reasons.
For a lease purchase to have a successful outcome it has to be done properly and the property must meet certain requirements. In order to find out if your property is a viable candidate for a lease purchase, we must first know more about your situation and view the property in addition to performing a market analysis. If we decide your property can be lease purchased, we then determine how the contract will be structured and proceed with listing the property on the MLS and more than 50 other popular online real estate websites. If your property is not a lease purchase candidate, other solutions may fit your situation.
If you have tried to sell your property without success, a lease purchase can be helpful by providing a much larger pool of potential buyers. It can also help owners avoid foreclosure, which is particularly important for those planning to buy another property in the near future. A lease purchase can be the solution to a number of situations especially when it comes to having someone take over your mortgage payments.
What Is A Lease Purchase
A Brief Overview Of How It Works
Why Lease Purchase Your Property
Here's how a lease-purchase (also called rent to own) typically works: The tenant/buyer (called an optionee) leases the property from the seller (called an optionor) for a period of time. The lease contract gives the optionee the right to buy the property at the end of the lease period, or earlier by mutual agreement, at a price agreed upon in the contract. The optionee pays a sum, called option money, to the seller at the onset of the lease. This money is applied to the purchase price if the option is exercised.
A lease purchase is very similar to owner financing with the main difference being when you sell a property using a lease purchase (which is considered a form of financing) the potential buyer (tenant) will lease the property for a short period of time, usually 12-24 months. Once the lease term has ended the buyer (tenant) must obtain a mortgage to purchase the property from the seller. With owner financing, the seller usually acts as the bank and there is no lease period.
The next important factor is placing the right buyer/tenant in the property. Many people are looking to lease purchase due to the stricter requirements involved with obtaining a mortgage but all are not what we consider a good candidate. Prior to approving a buyer/tenant our preferred mortgage broker will need to analyze their credit and income to determine if they will be able to secure a mortgage within the timeframe stated in the lease purchase contract. We select buyer/tenants who only have a few blemishes on their credit report that need to be corrected. They must also meet the income requirements for the property’s purchase price. Once the mortgage broker decides the buyer/tenant is a good candidate, they are then provided with a checklist of the necessary steps they must take to obtain a mortgage. Our mortgage broker will also assist and monitor their situation to make sure they are working towards clearing up the issues that is preventing them from getting a mortgage. This is a very important step but is often overlooked when executing a lease purchase.
The Lease Period
During the lease period of the contract, we manage your property in the same manner as a traditional rental property. The buyer/tenant will contact us regarding any issues they may have. We also collect the rent (which must be paid directly to the mortgage company). Most lease purchase contracts make the buyer/tenant responsible for repairs and maintenance however, this can be determined by the owner. If the homeowner chooses this option, we will include certain stipulations in the contract making the buyer/tenant financially responsible for any damage they have caused if they do not exercise the option to buy the property at the end of the lease period. We also require buyer/tenants to report any maintenance issues as they occur along with agreeing to mandatory inspections. The number of inspections will be based on the time length of the lease.
Buying The Property/Closing
Several months before the lease period comes to an end our mortgage broker will work with the buyer/tenant to get them approved for a mortgage loan. We then have the buyer/tenant and the seller sign a new purchase agreement that is traditionally used when buying a property. The purchase agreement will cover the standard issues such as closing cost, if the property is sold “as-is”, the closing attorney, the closing date, the purchase amount, etc. We also assist the seller with the entire transaction.
The amount of the commission/fees involved with executing a lease purchase varies depending on the property. The percentage is usually the same amount agents would receive in a normal transaction, which is up to 6% commission. This amount is split between the buyer and the seller’s agent (we represent you the seller). If an agent is representing the buyer/tenant (this is not always the case), they will receive a portion of the 6%. These fees are deducted from the option/down payment amount so the seller pays nothing out of pocket. There are no additional commission/fees charged once the property is purchased at the end of the lease period.
If the seller decides to use us to manage the property during the lease period (not required), we will receive the standard monthly property management fee of 10% from the rental fee, which the buyer/tenant pays and is normally calculated into the rent payment so the seller pays nothing.
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