With the Banks' tightening of the money, there has been a resurgence of Lease to Own Agreements lately. Although these deals are popular with both Buyers and Sellers, they are not to be taken lightly. Here's why these instruments are potentially dangerous:
Danger for the Seller: If the Buyers stop making payments under a Lease to Own Agreement, the Seller can not evict them. Instead, the Seller has to institute foreclosure action, which can take many months. In essence, the Owner could potentially have tenants who don't pay rent for a very long time (foreclosure action may take over a year), without the recourse of evicting them.
Danger for the Buyer: If the Seller is foreclosed on, the Tenant has very little recourse. Once the Foreclosure is implemented against the Seller, the Tenant is evicted by the Bank. The only recourse the Tenant has is to sue the Seller for the money in civil court. Good luck in recouping it! With Sellers getting 5%-10% of the sales price up front and better than market rent on these types of agreements, the amount lost by the Tenant Buyer is sizable.
Land Sales Agreements (Contracts of Sale) present the same dangers. The SCAR (South Carolina Association of Realtors) does not endorse Lease To Own Agreements. What is your experience with Lease To Own Agreements? Please share!
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13 comments • Myrtle Beach Real Estate by Mirela Monte • May 15 2009 09:26PM
Short & sweet; the longer version I posted earlier just did not do. Which one do you like better?
I think that this is so dangerous for either party, that it is not worth the risk. I have seen the foreclosures with the tenant scrambling and unaware of what was going on and that is not fair to them.
There should be TWO agreements - the lease which would allow for eviction for non-payment, etc. and the purchase agreement which goes into effect when several contingencies are met - financing approved, etc. and this agreement receipts any downpayment and application of rent to the purchase price....
I bought my first condo 40 years ago - that is what was used and it still works today!
Mirela, I am not comfortable using lease to own or any kind of seller financing for all the reasons you wrote about. They cannot evict because in essense it is a mortgage like transaction and the owner has to foreclose...long process!
Mirela-There are not many lease to own deals here in Mass. But thanks for the info, I really had no idea.
We do a lot of L2Os here and we write into the deal that if they are 2 months late in any given year that it reverts to a lease. We also give the buyer the right to call at anytime to check on payments as well as the lender calls if the seller is late on the payment.
Short and sweet!!! I may "want" to read the longer versions of things, but simply do not have time. You may want to link to the first version in case someone does have the time. Am featuring in the Rookie group.
I amfrom California and will have to check out how it works here. I have had questions about L2O and need to be better informed. Thanks
I don't like doing these either. Too much risk these days. No equity in properties, etc.
My family & I are actually living in a "lease to own" situation right now. Due to job relocation, we put our house up for sale in our previous city last Memorial Day weekend, and worked out a "lease to own" situation on a house in our new city. The deal was (is) that we close on the house in our new city within one week of selling/closing on our house in our old city. A portion of each month's rent goes into an escrow account towards the purchase of the home in our new city. We put down a substantial amount to do this....along with two $5000 payments during the year (also into escrow).....lease on our new house here goes through the end of July.....there was some nervousness involved, and we all knew it would take some time to sell, but certainly we would have things wrapped up WAAAAAY before the end of July 2009.
But.
Our house HASN'T sold yet, despite HUGE price drops throughout the year, many many showings, and tons of interest. The problem? All of the people interested in purchasing our home in our old city need to make it contingent on the sale of their homes. No can do! And we didn't rent the house out either because we really wanted to get a buyer in there as quickly as possible so that we could close as quickly as possible here.
We have two showings at our old house this weekend (we did another $25K price drop on Sunday....and now the house is priced for less than we bought it for....and after we bought it we put in 26 new windows and a new front door, repainted the exterior (HUGE house so HUGE bill), and installed a new gas fireplace in the family room. LOTS of money out, NO money in. NOT FUN.
Sellers would like to keep it as a lease purchase for 2 more years. We cannot afford to! So we are coming back and saying that end of contract period we will be cancelling lease purchase agreement, and offer to lease only for a year.
The market is still sliding, we are totally on the financial ropes, we don't want to screw anyone but frankly we have no choice in the matter.
If you are into the whole prayer thing, please send one up for our family that we sell our house soon.
It can be good if the has the property paid of and ask for a down he is also making interest and for the buyer that has less than stellar credit can help them out. We may have a lot of people coming through that their credit has been scared because of this economic crunch they still need a place to live. For the right situation it can be good.
Liz
Hi Mirela,
I'm with Wallace on this one. Two separate agreements (done right) can typically get around any equitable interest, or foreclosure vs eviction issues. But it's critical how it's done - even what you call the 'down payment' is crutial.
And a good way to help protect the buyer from the seller defaulting is to have all payments go through an escrow account that pays the lender directly. It's cheap and easy to do. It can also establish a documented payment history for the buyer.
I've bought and sold several properties this way - both with LO and CFD. And they worked out fine. But to me, a bigger concern right now (for both seller and buyer) is the buyers' ability to get a loan down the road. Especially if the property doesn't appraise. It's was a whole lot easier for both parties when property values were skyrocketing. : )
Thanks for sharing!
Two docs: a stand alone lease, and an option agreement.