LEASE PURCHASE &
REAL ESTATE SALES
The advantage to the seller in marketing a property as a lease option or lease purchase is that we set our listing apart from the competition and generate additional traffic for the property.
-We are able to attract clients who can’t purchase immediately but who do want to purchase. As Huntsville continues to grow and people move into the area, we commonly have clients approach us who are moving to Huntsville and have a property to sell in another state before they can purchase real estate in Huntsville.
-Another common reason clients can't purchase immediately is that they may need more time on a new job before they can get approval for a mortgage.
-With mortgage approval being so stringent now after years of being far to lax, it is also common for homebuyers to need time to improve their credit or save for a larger down payment before they can purchase. A lease purchase or lease option is a great opportunity for homebuyers in these situations.
-We are also able to catch the attention of those who were searching for a rental and only considered a purchase when they saw our marketing of a lease option, lease purchase property.
We have been able to sell properties that had been on market for over a year in neighborhoods that weren’t selling at all by marketing them as a lease purchase or lease option.
We structure lease option, lease purchase transactions using a standard sales contract and a standard lease.
The price, terms and closing date of the purchase are set on the sales contract as with any sale. The only difference is that the closing date is set no more than a year in the future. The Tenant-Buyer then rents the property until they are able to acquire the financing to purchase.
Since the closing date is set in the future, we negotiate the price and terms based on the anticipated market at the time of closing and not the time the contract is negotiated.
On the recommendation of our attorney, we structure our lease purchase transactions as options to purchase. She has had cases where a purchaser in a lease purchase defaulted and a judge ruled that the purchaser had an equity or ownership interest in the property. Rather than simply evicting a tenant in default. The seller must foreclose on the purchaser. By structuring the agreement as an option to purchase with a concurrent lease we avoid the potential for purchaser to claim an equity interest.
The attorney also stated that the earnest money paid by the home purchaser must be limited to $2,000 - $3,000. She has seen judges rule that large earnest money payments to the seller by the purchaser created an equity interest for the purchaser. The judge ruled that the agreement was an agreement to purchase and seller had to go through a long and expensive foreclosure process.
What is the difference between a lease option and a lease purchase?
Under a LEASE OPTION the Tenant-Buyer has the OPTION to purchase but is not obligated to purchase. Since the Tenant-Buyer is not committing to a purchase, seller is usually not willing to negotiate as much as in a lease purchase.
Under a LEASE PURCHASE the Tenant-Buyer makes a commitment to purchase and Seller makes the commitment to sell at the price, terms and time agreed on. Under a lease purchase the Seller has more incentive to negotiate.
Does the rent or any part of the rent apply to the purchase?
No. Lenders will not allow rents paid to be credited to the borrower. They are concerned with the potential for fraud. Lenders do allow the Seller to pay closing costs and pre-paid costs for the Buyer. We have successfully structured sales where a portion of the rent was applied to closing costs and pre-paid costs that were paid by the Seller for the Tenant-Buyer.
How does the Tenant-Buyer qualify for the lease purchase or lease option?
Since we have two separate contracts, the sales contract and the lease. The Tenant-Buyer must meet the basic qualifications of both.
Under the sales contract, we require that the Tenant-Buyer have a loan pre-approval from a trusted lender, even if that pre-approval is conditional. We call the lender and verify that the Tenant-Buyer will, in all likelihood, be able to get funding to purchase the property within the contract period.
Under the lease, the Tenant-Buyer must submit a rental application and be screened, as would any tenant. The screening includes a credit and public records check (which includes criminal records), verification of income and employment, checking previous rental history and checking references.
What if the Tenant-Buyer does not buy the property at the end of the lease purchase or lease option?
The Seller has two ways to recover their losses. In most lease purchase, lease option agreements the Tenant-Buyer is required to pay a non-refundable earnest money.
Again, everything is negotiable as long as we are able to reach an agreement that is fair to both the Tenant-Buyer and the Seller while not concerning the lender.
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