It’s true that Lease Purchase(s) can turn out to be an acceptable option for both Buyers/Renters and Sellers/Landlords. However, statistically, only a small percentage of such agreements wind up to be a successful closing. Far more wind up in court! Why?
To quote a renowned real estate attorney in Middle Tennessee, “They are a disaster waiting to happen!” Even an attorney with a predominant Errors & Omissions Insurance Carrier in Tennessee recently (and without hesitation) stated to me; “Lease Purchases are nearly always a disaster!”
To illustrate just a few (of many) things which could go wrong form a Renter/Buyer’s standpoint:
- You may have paid dutifully and faithfully and in full every month of your lease only to discover that the landlord has not been paying his/her mortgage and the bank has foreclosed upon the property. You likely lose a sizable, non-refundable earnest money and have no legal recourse to recover any part of rental payments that were to be applied to the purchase, etc. Similarly, some sellers initiate evictions following just one slow or missed payment. Read the fine print!
- Many agreements will require buyers to accept the property AS IS at the time of the commencement of the lease, while waiving any further right for house inspections at or around the time their purchase option is exercised. There’s several potential problems with that scenario. A renter may have to spend several thousands of dollars repairing/replacing HVAC, plumbing, electrical problems, etc. Will that deplete monies the renter was saving up (i.e. for their down payment)? Moreover, lender required repairs can upset many of these contracts, resulting in loan denial(s).
How about from a Seller’s standpoint:
- If the renter/buyer possess your house and suddenly stops paying rent, it may take a year with no income coming in for legal eviction proceedings to run their course. Many sellers do not plan for a worse case scenario like that and as a sudden result, interruption in their cash flow causes many owners to go into a financial tailspin themselves. Moreover, many times the reason why a renter is not a bonafide, qualified buyer at the commencement of a Lease/Purchase is because of previous credit issues, past judgements, bankruptcy, etc. Many times those circumstances manifest themselves again in the future which results in loan denial one, two or three years out.
- Sellers, how difficult is it to agree upon a purchase price today, not knowing what the fair price market price will be one, two, or three years out? It is very likely that a lender will require an appraisal to be as great or greater than the contract sale price. In a declining market that factor may cause a contract to go “south”. Conversely, how would you feel if you agreed to sell your property at $150,000 but two years from now, the appraisal turned out to be $190,000?
- If a buyer/renter could not or would not purchase at the end of the lease period, what is the likelihood that the tenant did not or would not spend money on necessary repairs? The unexpected depreciation of your property can be sizable indeed!
These are just a few of many things to keep in mind regarding Lease/Purchase Agreements in Middle Tennessee. Probably only 10% of the agreements result in satisfactory outcomes. My clients have had a 50% success ratio but even I, as a principal broker, strongly recommend to clients and agents that I train that a real estate attorney be consulted and approve of any such Lease/Purchase Agreements prior to enactment because of the increased risk factors cited above.