Dec. 15, 2008 - Rent to Own, Lease to Own, Lease Purchase
I'm going to start this post with this warning:
"In most cases, the accumulated rent is used to lower the purchase price or to reduce closing costs. (Fannie Mae and Freddie Mac guidelines generally preclude using rent money toward the down payment, mortgage experts say, because buyers need to prove that they can save on their own and thus qualify for a loan.)" From this article
I was greatly surprised to see my friend, Jonathan Miller's recent quote in this same article:
"The rent-to-own concept represents “a change in mind-set” during these tough economic times, said Jonathan J. Miller, a founder and the president of the Miller Samuel real estate appraisal firm. “The longer this drags out, the more acceptable this option becomes; this is just evolving,” he said."
It was back on September 6th when I wrote"Might "Lease Purchase" be this market's "il Salvatore" which won a Gold Medal in Zillow's Carnival of Real Estate that week hosted by Larry Cragun of Real Estate Undressed that week.
Back on September 6. 2008 when I first took Lease Purchase out of the closet, and dusted it off as a possible answer to current market woes, we didn't get a chance to fully explore the option in the many, many comments. An argument ensued about Lease Option vs. Lease Purchase.. That debate has a simple answer (even though it took over 200 comments to keep saying the same thing again and again back in September :)
If you are buying it today, but need time to close and are renting it until you close, then it is a Lease Purchase. If you are renting it today, with the option of maybe buying it at some point in the future at a price set today...that is NOT Lease Purchase.
In the last several days I have had 6 out of 10 situations exploring Lease Purchase vs. straight out buying right now. #1 reason as to why was that the buyer owned another house that isn't sold...isn't even on market to be sold. This means they don't have the money from the sale of their current home to use as a downpayment on the home they want to buy.
#1 reason for sellers to be approaching Lease Purchase as a market and sales tool. i.e from yesterday's stats - FOUR YEAR supply of high end homes in Kirkland 98033. Any builder or seller in that upper price range of $1.2M or above (approx 20% of all homes for sale in that zip code) might be looking at foreclosure as the alternative. Many of these homes are new and vacant. Some are already showing the listings as "for sale or for rent" with the rent option being a Lease Purchase optiona and not a straight out rental offering.
Back to the warning in the first paragraph. I would think if a 3rd party collector collected two separate checks each month, one payable to the owner that he can use to pay the mortgage and one payable to the buyer himself that is put into a savings account in the buyer's name, that might meet the Freddie and Fannie Guidelines. Or maybe Freddie and Fannie and whomever is pulling their strings these days will understand the need to accommodate Lease Purchase in some meaningful way at to cash to close.
One would hope with the market in a mess, that they would be willing to work through this option for the sale of the real estate market...the Country and for Presdient-Elect Obama. In any case, a final step in the Lease Purchase contract, besides attorney review, would be LENDER REVIEW where a lender runs the method past the underwriter before the proposed "rent-buyer" takes possession of the property.
To sellers, if there is a 6 month inventory of property for sale of like kind to yours...you may not want to seriously consider going this route unless you are on the brink of getting seriously underwater. But for those with a 2 to 4 year supply of inventory on market in your price range...open all the windows to freshened ideas...and the door to Lease Purchase.
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