Many folks have been calling me the last several days about homes available through a lease-purchase program, so it seemed like a good time for a quick primer on the topic.
In short, when you sign on for a lease purchase, you are renting the property for a set period of time and agree to purchase the home at the end of the lease, whether that be six months or a year or more later. The purchase price is negotiated at the time the lease is signed and also can be tied to an eventual appraisal though there often is both a cap and a floor to the price.
Deposits are larger than normal. In Arizona, owners can collect 1 1/2 times the monthly rent as a standard deposit unless the tenant agrees in writing to providing more. You usually see higher-than-normal deposits required if someone has shaky credit, but it’s also common to see on a lease purchase. (This answers the question of one caller who maintains it’s illegal to collect more than one month’s rent as a deposit. You were wrong. Sorry.)
A portion of that larger deposit is set aside as a security deposit. Another portion can be set aside as an earnest deposit for the purchase. The rest, more often than not, is going to be non-refundable.
Rents may be above market rates with the difference going toward the eventual down payment or closing costs on the purchase. But this extra amount paid also generally will be non-refundable in the event the tenant doesn’t buy.
(Quick note: there are lease purchases and lease options. With a lease purchase, the tenant is saying they will purchase the property. With a lease option, the tenant retains an option to buy the home at lease end, precluding a sale in the interim unless they’re given the right of first refusal.)
There are two basic reasons a tenant doesn’t end up buying … they get tired of the home and want something different (though there’s a significant financial risk if you walk away from a lease purchase) or they can’t qualify for a loan at lease end.
Many look to lease options or lease purchases as a way of buying a home with iffy credit. But it really isn’t, at least not unless you expect your credit to be far better by the end of the lease because you have to qualify for a mortgage.
That’s where most renters decide to continue renting. Lease options and lease purchases may be a good option if you’re absolutely certain you love this one house and are sure you will have the ability to borrow. But if either is less than firm, it may be best to pass.
[tags]lease purchase homes, Phoenix real estate[/tags]