From: asylvain@felix.filenet.com (The Chipmunk)
Newsgroups: misc.invest.real-estate
Subject: Re: Lease with option to buy
Date: 21 Jul 92 20:14:21 GMT
Reply-To: asylvain@fritz.filenet.com (The Chipmunk)
Organization: Foundation for the Increased Wealth of Chipmunks

Written in article <1992Jul19.051253.12132@TorreyPinesCA.ncr.com>
 by cs6@TorreyPinesCA.ncr.com (Eric Sit 3611):

: I would like to hear some discussion, opinions, comments on "lease 
: with option to buy" a house.  Under what condition would it be 
: to the seller's advantage to do that?  Vice versa, how would it 
: be a good deal to the buyer?

Note: I can't remember who's the "lessor" and "lessee," so I'll just use
"buyer" and "seller."

Advantages to the seller:

All advantages normally found as a rental landlord.  Ie, tax-write-offs
for all expenses, plus accelerated depreciation (what is it this year, 
29.5 years?).

Ability to "lease" for somewhat more than the market "rent," since part
of the monthly payment usually applies to the down payment.  This can
change a negative cash-flow as a rental into positive (or at least 
neutral after taxes, depending of course).

During the lease period, the seller gets invaluable first-hand experi-
ence towards the buyer's credit-worthiness.  If the buyer proves to be
punctual, carrying paper for the balance of the down payment once the 
lease is up could be considered less risky.  If not punctual, the seller
can demand the down payment immediately (or, if really desperate to
unload, simply lower the price and forget the down).

It's sometimes a good way to "unload" the property in a slow market,
especially if there's no positive cash-flow by renting.

Disadvantages to the seller:

Some of the same disadvantages found in being a rental landlord.  Eg,
the buyer may trash the place.  If the buyer takes full possession on 
schedule, who cares, but they could move out and leave a mess.  Or, they 
could stop paying, and the seller will have to kick them out, all the 
while still paying the mortgage.

There is the risk that the buyer will walk away, and even if they left
the property immaculate, the seller has to go thru all the trouble of
finding another buyer/lessor/renter all over again, and meanwhile still 
pay the mortgage.

The seller probably didn't want to be a landlord, because of the rental 
disadvantages.

The seller will NOT get the equity out of the house right away, as with 
a normal sale.  If the seller absolutely MUST have this cash, and can't 
take out a junior loan, s/he may just be stuck.  Eg, if the seller was 
planning on moving up to a larger house, s/he may have to settle for 
something smaller, or rent for the duration of the lease.

Unlike many transactions which are rather standard, and a lawyer is
merely recommended, a lawyer is probably required equipment for a lease
arrangement.  Lawyers always show on the disadvantage side.

Advantages to the buyer:

They get to "buy" a house with little money down.  It turns out that
lots of people can well afford a monthly note, but they are completely
unable to save even so much as 1st + last month's rent + security depo-
sit, let alone a whopping 20% down payment.  Under a lease arrangement,
they can move in as though renting, pay a larger-than-rent lease, then
after two or three years own the place outright.  They may still need to
have a down, but it should at least be smaller than a normal purchase.

If it turns out they don't like the place (perhaps they find out they 
have Neighbors from Hell), they can simply walk away, the same as any 
other rental.

If they DO like the place, they should have their spending habits
adjusted to the lease just in time to convert it to a mortgage at
roughly the same amount.

During the lease period, the buyer has demonstrated their credt-
worthiness.  If there is a balance due on the down payment at the end of
the lease, they might more easily convince the seller to carry paper.
This could work out to a true no-money-down purchase.

Disadvantages to the buyer:

They usually have to pay more than market rent, but they don't get to
write it off their taxes like a homeowner.  So, whatever the lease
amount is, that's what they pay out of pocket.  No help from Uncle Sam.

While they are paying a larger-than-rent lease, they may still be
required to additionally save for the balance of the down payment at the
end of the lease.  If they had trouble saving before, they're REALLY
going to have a time of it now.

While they are "owning" the property, it still really belongs to the
seller.  Therefore, the seller might balk at ripping out that silly $900
stove that no one uses to install an aquarium.

Comments:

The actual terms of the lease can vary, therefore so can your mileage.
There are terms such as buying the property in 3 years at today's price
(advantageous to buyer) or re-appraising; what fraction of the lease is 
to be applied to the eventual down payment (so long as the cash-flow 
ain't negative, the seller may not care!); how long the lease is for;
etc.

Therefore, some of the advantages and disadvantages might depend on the
actual terms.  A buyer may find, eg, that they not only have to pay a
larger-than-rent lease, but they ALSO have to save up for a down payment
at the end of the lease.  This can be a heavy burden.

If I had a house I couldn't unload, I'd set up a lease with terms such
as the following:

The lease amount exactly (or at least closely approximates) my mortgage
payment.

The lease amount (from the buyer's perspective) is the market rent + a
fraction applied to the down payment.  (You don't have to tell him that
it just so happens to exactly cover your mortgage!)

The lease term will be long enough so that the down payment accrued will
be enough so that the buyer needn't cough up too much more cash (hopefully
zero, but that might not be possible).  Of course, the deal can always
be structured such that down payment == all lease payments made.

At the end of the lease, the house will transfer as tho sold at today's
market appraisal (I want to attract buyers by making it attractive ... 
altho, with values sinking nowadays, this could back-fire.)

Should the buyer decide to back out later (and not finish the lease) all
monthly down payments are forfeit (but perhaps the "security deposit" is 
refundable).

BUT ... again, as with any transaction ... don't take my advice as
having any legal authority or credibility whatsoever.  I'm no lawyer.
I've investigated leasing, but I've never actually done one.
("Now he tells me!")

-- 
The Chipmunk.
Opinions are mine, batteries not included, void where prohibited.
Greener's Law: Never argue with a man who buys ink by the barrel.
( ... or gets his Usenet access for Free ... )
Newsgroups: misc.invest.real-estate