Lease/Purchase Homes Defined
Sell or lease/purchase your home?
Have you ever dealt with bad renters? Late payments? Stains on the carpet? Calls late at night about a stopped toilet? Sometimes being a Landlord is not a fun game, especially when you have a nice home and bad tenants.
Have you taken advantage of the recent low interest rates and refinanced your home to the maximum? What about a home equity loan or other form of second mortgage? Do you know how much you can walk away with from the closing table after paying all mortgage and associated costs? Many people walk away with very little or nothing. Some even have to pay. If this scenario applies to you, it may make sense to delay the sale of your home. But, what if you have to move?
Whether you are a landlord or a seller, it may be possible to generate positive cash flow and lock in a higher selling price with a lease/purchase agreement.
Here's another scenario: You want to sell your own home, but it's not moving as fast as you would like. You've thought about renting it to cover your mortgage payment, but nobody wants a short-term rental with no idea when they have to move out. So you decide to leave it vacant. You make two, three even four mortgage payments. Your insurance company cancels your homewoner's policy because it has been vacant for more than 30 days (it's true, they can do it so read your policy!). You don't want to severely discount the price, yet you need to do something NOW! Here's a possible solution - lease with option to buy or lease/purchase (also referred to a rent to own).
What does the lease/purchase concept mean?
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At some time in your life, you have rented a house or apartment, so you are familiar with a lease agreement. If you have ever bought or sold a home, you are familiar with a purchase offer. The lease/purchase agreement is a hybrid of the two - a lease agreement combined with a purchase offer (called an option, or that is, the right to buy the home at an agreed upon price).
Here's an example of how lease/purchase works. Let's say you have a house worth $100,000. The "going rent" in your market for that house may be about $800 per month. A lease/purchase agreement would read essentially as follows:
| Lease Term: Two Years | Monthly Rent: $800 |
| Purchase Price: $100,000 | Rent Credit: $400/month |
Usually, part of the monthly rent will be credited towards the price of the house. In the above example, 50% or $400 per month is being credited. So if the tenant decides to buy after one year (lawyers call this "exercising their option to buy"), they would pay $100,000 - $4,800 = $95,200. If the tenant/buyer does not purchase the property, the owner would keep all of the monthly rent. The best part is, the $400/month is considered "option consideration" by the IRS and does not have to be reported as income until the house is sold or the lease/purchase agreement expires!
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