Lease Purchase/Lease Option Finance

Acquiring a property with Lease Purchase/Lease Option creates a
Win-Win-Win situation for Buyers, Sellers and Real Estate Agents.

FINANCING is the KEY

When the seller is is not willing or able to finance the mortgage, and the buyer needs to qualify for a new loan, then special attention needs to be given as to how the financing will be arranged.

Option Money

In a Lease Purchase/Lease Option Agreement the buyer gives the seller what is called "Option Money".

Courts have ruled that an Option Payment in excess of 33 percent of the sales price has been re-characterized as a Sale and not a Lease Purchase/Lease Option

Lease Purchase/Lease Option

The Option Money is the consideration for keeping the offer open for a definite period of time and could be paid in any form other than cash (it could be land, car, boat, etc.) also the buyer could agree with the seller that in lieu of cash, the buyer will make improvements to the property.

It is also customary in a Lease Purchase/Lease Option Agreement that part of the rent be applied as a credit towards the down payment or off the sales price.

Example

A seller has Lease Optioned their home under the following conditions.

The buyer gives the seller $ 3,500 in cash and will be making improvements to the property.

There will be $ 1,475.00 a month payment of which $150 will be credited to the buyer each and every month either towards the down payment or sales price.

Exercising the Option

The Lease Option or Lease Purchasing period is up and it's now time for the Buyer to exercise their option, and to start the loan process.

The Buyer has made an appointment with a mortgage company, and the lender tells them to bring copy of their Lease Option or Lease

Purchasing agreement.

The lender notes that the sales price of the property is $146,250.00. $3,500 as option money, the rent $1,475 with $150 being credited back to buyer each month.

In two years the rent credit amounts to $ 3,700.

The lender points out to the buyer, that his down payment equals $7,100.00 (the rent credit plus the option money).

Things to be aware of

The lending industry has guidelines when making loans on Lease Options or Lease Purchasing Agreements, some lenders will allow only the cashportion of the Option Money to qualify towards the down payment.

In this example $3,500.00
The guidelines may also state that only the portion of the rent paid in excess of the fair market rent can be applied as a down payment. In this example, the Buyer paid
$1,475.00 a month for rent on a property where $1,250.00 would be fair market, giving the Buyer $225.00 in excess of the fair market rent.

With no credit for the improvements the Buyer made to the property, the Buyer will have paid a total of $7,100.00
($3,500.00 Option Money + $150.00 a month X 24 months = $7,100.00 )

Most lenders today have programs that will allow a qualified Buyer to have as little as 3 percent down payment.

Under a First Time Home Buyers Program 3 percent down payment, plus closing costs of several thousands of dollars, this Buyer will qualify for a loan.

Also remember that income, and income-to-debt ratios need to work out, and of course the Buyers credit is very important.

It is important to remember that unless you have experience in writing contracts, negotiating, and working with the Buyers through the Option Period, you should be working with a Good real estate agent.

Financing a Lease Purchase

Questions, comments or suggestions on any of these articles, Send us an

or call Wayne H. Wagie 786-326-4747

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