Rain City Guide

1. Comment from Sniglet
Time September 6, 2008 at 6:07 pm

I am missing something here. Where is the “lease” in the example cited? It sounds like this is simply an out-right FHA sale. I thought that a lease purchase was more in line with leasing out the home while giving the renter the OPTION to buy at some point in the future, and considering the rent and/or security deposit as part of the eventual purchase price should they so choose to buy later on.

2. Comment from ARDELL
Time September 6, 2008 at 6:48 pm

I don’t blame you for being confused, not one bit, Sniglet. Because the world at large commingled “Lease-Purchase” with “Lease with an Option to Buy”. These are two completely different things. Somewhere along the line, along with forgetting that people were supposed to have enough income to buy (among other things) someone slipped forms on a shelf that that are just plain flat out wrong IMNSHO.

“lease-purchase — a method of acquiring ownership of property whereby all or a portion of rent payments made under terms of a lease may be subsequently applied to the purchase price”

That is a real lease purchase as shown in my post. A portion of the rent payments are applied to the purchase price, to gather in increments the “missing” downpayment on day one. Lease purchase is the means to “save” the downpayment via a portion of the rent payments. In a Lease Purchase you are obligated to close at some point in the future. In a Lease with an Option to Buy, you are not obligated to close in the future, you have “the option” to close in the future at a stated price.

An option to buy a house is the same as a stock option. You pay a lump sum up front to POSSIBLY buy the property at a stated price at some point in the future within a set end date. If you buy the property, you have locked in the price. If you don’t buy the property, you forfeit the option fee. You are not obligated to buy as long as you are willing to forfeit the option fee.

If you want to buy the house right now and the only thing holding you back is that you don’t have enough cash, then Lease Purchase is the answer. If you want to rent right now, but want first right to buy the property should the owner decide to sell (so he can’t kick you out), then you want an option to buy.

Lease with an Option to Buy and Lease Purchase are not the same thing and are used for two completely different reasons. But for some reason you will see these two commingled as if they are the same. They are not.

Sometimes I think what “this market” needs is a time machine to go back 10-15 years before things got muddied. Often we don’t need new answers at all…we just have to remember the old ones that got shoved under a bus.

3. Comment from Kary L. Krismer
Time September 6, 2008 at 6:51 pm

I don’t think she filled out the details, but it sounds like it’s a lease at first for some unspecified period, and then they close a sale. The lease price at first equals the monthly cost to buy, but part of that is put away towards closing, if there is a closing.

The details are a bit lacking, but I have a few problems with this one.

First, it’s not clear if the option price is at some sort of a premium. Typically they are, because otherwise the lessee is just tying up the property, and faces no risk at all. But that might be due to the extra rent being forfeited if there isn’t a close. I guess that could be a good tradeoff.

Second, I don’t see how this helps the current owner move up. It doesn’t give them any money at all until the thing closes, over what would be obtained by merely renting it out. So what do they do in the interim?

Third, another timing issue. How do you possibly find someone willing to buy on these terms, and coordinate that with the purchase of another property? That seemingly would be very tough.

4. Comment from Kary L. Krismer
Time September 6, 2008 at 6:57 pm

I wrote the above before Ardell posted #2 above.

I think you’re placing too much distinction on terminology. The real difference is just when the option amount is paid. With what you call an option to purchase, it’s paid up front. With your lease purchase, it’s paid over time. Assuming the remedy for breach on the lease purchase is forfeiture of the extra payments, it is in effect just the same as an option to purchase because the buyer can walk. The only difference is if they walk they lose what they paid over time, versus what they paid up front.

Also, Craig could perhaps jump in on this one, but I suspect that if the buyer defaults, rather than an unlawful detainer you’re looking at a forfeiture of a real estate contract, which is a process more akin to foreclosure.

5. Comment from ARDELL
Time September 6, 2008 at 7:05 pm

Kary,

There is no “option price” in a lease purchase. It’s a purchase contract with a long close…not an “option to buy”.

As to your “second” there are many properties sitting on market for 10 months or longer. So having a 10 month closing AND money in the interim is a good option for sellers having a problem selling a vacant property. Some people are trying to sell their rental properties in order to tradeup. Heck, they can move into Mom’s house for 6 months if that’s how long it takes to accumulate the down money.

This is an alternative for people whose properties could be on market for 10 months without selling at all. Take a look at condos in Renton and houses in Tacoma. Desperate times call for creative selling. This will fill the gap created by no zero down, and it is the method that WAS used before there was a zero down option in the marketplace.

” How do you possibly find someone willing to buy on these terms, and coordinate that with the purchase of another property? That seemingly would be very tough.”

I don’t understand that part of your comment. This is a “first time buyer” program for the lowest end of pricing for people with good credit and income, but no cash saved. They shouldn’t have a property to sell. There are many people already in their new homes who haven’t sold the ones they left. This would be a good option for them.

Lots of single people or people without children own condos or townhomes that aren’t moving because the buyers have no cash and there are no zero down loans. Yes, they may have to find an interim stay with someone solution. But if the math equals less time to closing than they might expect to be on market anyway…it’s a good option.

ALSO, it helps prop up prices. A condo owner may have two choices. Lease Purchase or drop the price into the toilet until someone with money buys it as an investment. Moving to Mom’s for 6 months or 10 months is better than losing $50,000 on a $200,000 condo, don’t you think?

6. Comment from Riley Smith | Coconut Grove Real Estate
Time September 6, 2008 at 7:16 pm

Very detailed, excellent post. Many clients don’t even know that this would be a possibility for them. It is our job as Realtors to educate them on their options.

7. Comment from Sniglet
Time September 6, 2008 at 7:29 pm

Well, if you have to fully qualify for a lease-purchase just as if you were doing an outright purchase I fail to see what the advantage to the buyer is.

8. Comment from Kary L. Krismer
Time September 6, 2008 at 7:31 pm

The buyer could live in the house for the period, see if prices go up, and if not move out.

9. Comment from Sniglet
Time September 6, 2008 at 7:39 pm

Kary wrote: “The buyer could live in the house for the period, see if prices go up, and if not move out.”

That’s not what Ardell seemed to say. If I interpret her comments correctly, the buyer in a lease-purchase is COMMITTED to close at some specified time.

Again, if you are having to make the same payments as buying, and are comitted to buy anyway then why bother with a lease-purchase?

10. Comment from Sniglet
Time September 6, 2008 at 7:43 pm

About the only thing I can think of to commend the idea of a lease-purchase is as some sort of forced down-payment savings plan. If the buyer doesn’t have any savings for a down-payment, the money collected during the “lease” period could go towards the down-payment at the eventual closing.

11. Comment from Kary L. Krismer
Time September 6, 2008 at 7:44 pm

But they could default, and lose their “extra” payments. As Ardell wrote: “If the buyer doesn’t close, then the $7,650 gets treated in whole on in part as Earnest Money forfeited to the seller based on the original agreement.”

12. Comment from Kary L. Krismer
Time September 6, 2008 at 7:46 pm

Ardell, are you saying this is mainly for the seller who already bought their new place? I could perhaps see in that scenario (subject to my concern you might need to foreclose them out).

13. Comment from ARDELL
Time September 6, 2008 at 7:59 pm

Kary,

Also there are people renting out of State or out of area, who can’t buy there until their now empty condo sells here. So they are wanting to “move up” or make a somewhat lateral purchase, and aren’t living in the one they are selling. This would work really well for those people and I know many owners in that situation.

When I say “this Market’s il Salvatore” I wasn’t referring to the Seattle Market exclusively. If someone moved to CA or NY for a job and can’t buy there until they sell here, for instance. Clearly Lease Purchase on a less than one year basis could be a fabulous solution for a relocated seller.

14. Comment from Tim
Time September 6, 2008 at 8:08 pm

Sniglet,

#10: yep. It is also feasible that the borrower is on the cusp of qualifying traditionally, but needs time for whatever reason and the seller (motivated) honors that.

Lease Purchases: for the most part is a purchase.
Lease Option: for the most part is a lease with the possibility of closing a sale. Our office has seen lease options eventually culminate in sales.

15. Comment from Tim
Time September 6, 2008 at 8:14 pm

Forgot to mention that some builders are now heavily pushing lease options. On a side note, I do think that when marketing a home for sale it could very well be that they are they are confusing the two. But both can lead to a bonafide sale. It is a matter of agreement on specific terms and the “option” language either being present or absent among other stuff.

16. Comment from Scotsman
Time September 6, 2008 at 8:17 pm

So, let me see if I’ve got this right. The buyer gets to pay not only the lease amount, but an extra amount ($770) each month that goes into a “savings account’ that is forfeited when he decides it would be stupid to buy a condo for $250,000 that is now worth $235,000.

This is a great deal for the seller, and that’s about it. The buyer gains nothing over what they would have had if they continued to rent, and they lose the flexibility to make future buyiong decisions without penalty. There may be some small tax consideration, but that would most likely be canceled by the home owner’s dues.

Too much of a stretch. These strategies worked in a rising market, but do little when prices are more likely to fall than even remain flat.

17. Comment from ARDELL
Time September 6, 2008 at 8:30 pm

Kary said: “The real difference is just when the option amount is paid. With what you call an option to purchase, it’s paid up front. With your lease purchase, it’s paid over time.”

There is a HUGE difference. In a lease purchase there is no option money and there is no option to NOT buy the house, same as any purchase. In an “option to buy” you are buying the option with the option money and have no obligation to purchase at all.

Go look up the terms in a glossary. Maybe in one of your old law books

If there is no “option (to not buy)” there is no “option fee”.

Many, many immigrants bought their first homes via lease purchase for many years in this Country. It is not a “new” concept. It is the means by which most 1st and 2nd generation Americans bought their first homes for at least a hundred years. The combination of Lease Purchase and Government programs like FHA assisted most people in buying their first homes who had no accumulated monies, but could afford a higher monthly payment.

In fact one could say that Lease Purchase is the way for people to buy who have few if any other “options” to own.

18. Comment from ARDELL
Time September 6, 2008 at 8:40 pm

Kary,

Your #8 is a “Lease with an Option to Buy, not a Lease Purchase”. If someone welches on a deal in a Lease Purchase, he’s a cheat and a liar and a stinker, not a smart businessman. If you want an “out” then be honest up front and ask for a “lease with an OPTION to buy” not a Lease Purchase. A Lease Purchase is the same as any purchase contract and you are expected to proceed “in earnest” and “in good faith”.

It’s about integrity. Do what you say you are going to do. If you are buying and only renting until you are able…then it’s a Lease Purchase. If you are renting and want an option to purchase, maybe and if things look good later, then it is a lease with an option to buy.

Don’t confuse the two. They are not the same. One is a renter and one is a buyer from day one. They are not the same.

19. Comment from Sniglet
Time September 6, 2008 at 8:42 pm

Ardell wrote: “assisted most people in buying their first homes who had no accumulated monies, but could afford a higher monthly payment.”

Really? My understanding was that historically rent prices were virtually the same as purchase prices (if not higher). It has only been in recent years that the costs of home-ownership exceeded the cost of renting. Thus, it would seem that purchase-options really aren’t attractive. At least not until the monthly payments for the purchase option would be the same as rent.

20. Comment from ARDELL
Time September 6, 2008 at 8:43 pm

Sniglet,

Lease Purchase is for someone who wants to buy right now, and the only thing holding them back is there are no zero down loans. They must first qualify for an FHA Loan except they don’t have the cash needed. The cash to close has to be the ONLY missing piece to why they aren’t buying right now. As soon as the set aside monies equal the money needed to close…it goes to the closing table.

THAT is a Lease Purchase.

21. Comment from Rhonda Porter
Time September 6, 2008 at 8:53 pm

I could see this being a possibility for borrowers who have had a recent ding on their credit (FHA financing prefers the last 12 months to be free of lates) or who are working on paying off some collections, etc. Would a lease option be considered for a borrower w/blemished credit?

Especially w/down payment payment assistance programs going away at the end of this month, those who are shy on the 3.5% down payment for FHA–maybe they don’t want to dip into their 401k (or borrow against it) and maybe they don’t have family who can chip in or they just want to do this on their own.

Ardell, with this type of agreement, does an attorney need to structure it or are their forms provided to agents (via NWMLS)?

22. Comment from Rhonda Porter
Time September 6, 2008 at 8:54 pm

woops, I should have said “lease purchase” instead of “lease option”…my bad!

23. Comment from ARDELL
Time September 6, 2008 at 8:56 pm

Sniglet,

Yes, the cost to rent and the cost to buy were the same, at least on an after tax basis. The monthly was inflated to create the “forced savings” to accumulate the downpayment. Or in some and even many cases, the seller agreed to less than fair market rent by keeping 2/3rds of the fair market rent and setting aside 1/3 for the downpayment.

Many immigrant homeowners here helped new people from their Country in this manner. That is why there were so many neighborhoods of all one ancestry in the larger cities for so many years.

In my example above, the inflated monthly in excess of fair market rent value equals the eventual mortgage payment. Basically the lender gets to see that the buyer is able to make a payment equal to the mortgage amount. It really helps with the loan approval and the buyer also gets to prove to himself that he can afford the mortgage before he takes it on legally. It’s a real win-win.

You need expert assistance as this done badly could look like a “silent 2nd” which is illegal.

A silent 2nd is where the seller inflates the price and pretends there is a downpayment. If you don’t keep good records of setting the buyer’s money aside every month, and the seller just wants to “say” he got the money…that is illegal. Not too long ago I saw a builder go to jail for that. Be on the lookout for silent seconds in this market. There will be temptation to do them.

24. Comment from Rhonda Porter
Time September 6, 2008 at 9:03 pm

Side FHA note: someone with an income of around $60k could qualify for the FHA total mortgage payment of $1900 (if they have low monthly debts) and the rate I quoted on Friday (that Ardell has referenced) would be valid down to a 620 credit score.

FHA does not have strict qualifying ratios.

25. Comment from ARDELL
Time September 6, 2008 at 9:06 pm

Rhonda,

1) Dinged credit should be an option to buy, as the reason for the delay is not the cash to close. Lease Purchase if for cash reasons only, as it is an outright promise to buy. With dinged credit there’s always the potential for another ding. It doesn’t have a guarantee at the end of x months like saving the downpayment does.

2) It really is a normal lease contract and a separate purchase contract with a long close date. Of course they have the right to cancel the lease at close of escrow. There is a legal contract that melds the two and sets the provisions for all the what ifs. That has to be drafted by an attorney based on the specific agreement.

So the agent can draw up the lease. The agent can draw up the purchase contract. Two completely separate agreements. Then the agent sets the “meeting of the minds” on a separate paper with some “what ifs” and the attorney reviews both contracts and draws up the final paperwork.

I did many of these back in the old days before zero down loans and in the last market that was as bad as this one. The seller usually gets a good enough price to make it worth it, the same as a contingent offer. A price based on the comps would be appropriate. In a down market, that’s a really good price for a seller. Everyone wins.

26. Comment from Rhonda Porter
Time September 6, 2008 at 9:12 pm

Ardell, what about doing a real estate contract instead?

27. Comment from ARDELL
Time September 6, 2008 at 9:12 pm

Rhonda #24,

I always “err” on the side of extremely conservative and I even stretched this from 28% to 30%! I’m using a 30% front end and that really is high enough! What are you using for the front end and the back end to get to $60,000?

Let’s see. If payment is $1,990 and income is $60,000. $60,000 divided by 12 is $5,000. That would be 40% of GROSS INCOME before car payment, etc. That’s too high. You COULD qualify, but after what this country has been through…that is too high.

FHA should not be doing a 40% front end. What is the back end for Crissakes?

28. Comment from ARDELL
Time September 6, 2008 at 9:21 pm

Rhonda,

I don’t understand your question #26. If they have the cash to close including downpayment, then you would do “a real estate contract instead”. Did you mean a “land contract”?

29. Comment from ARDELL
Time September 6, 2008 at 9:23 pm

Kary #12,

I’m going to answer some other people I missed first. I’ve already given you more than your share of answers

30. Comment from ARDELL
Time September 6, 2008 at 9:24 pm

Tim #14

YES!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!1

31. Comment from ARDELL
Time September 6, 2008 at 9:25 pm

Tim #15

Watch those builders very carefully for silent seconds. You don’t want to get in the middle of those.

32. Comment from ARDELL
Time September 6, 2008 at 9:28 pm

Scotsman #16,

I agree with you. This is ONLY for someone who really wants to buy for whatever reason. The people I see doing these are the people who really hate to move, like people who have been forced out by condo conversion projects etc.

People who were forced out of their rental by the owner are often the best candidates for lease purchase agreements.

33. Comment from Rhonda Porter
Time September 6, 2008 at 9:33 pm

1900/5000 = 38% for the front ratio…high yes, but possible (and happens often) and I did say they shouldn’t have much for other debt. I would prefer to see lower as well, but I’ve seen these approvals. Back end ratios can be 45% (or possibly higher) based on the response from automated underwriting.

Regarding contract, I was referrring to a recorded real estate contract (more common in earlier years–BMT–around here and not used for just vacant land).

34. Comment from ARDELL
Time September 6, 2008 at 9:35 pm

Kary #11 and #12,

Why would a seller take a contingent offer, Kary? Lease Purchase is an option for someone who is priced at the comps or below the comps but still can’t sell. It’s an alternative to yet another price reduction.

As to the buyer could default…oh well. The buyer “can default” on ANY purchase contract. At least with this one the seller has some money to cover his mortgage payment in addition to the forfeited Earnest Money.

How much of the accumulated funds are forfeited? Usually the same amount as any “Earnest Money” amount on any purchase agreement. If the accumulated fund is more than the normal “Earnest Money” amount, then the seller keeps some and the buyer gets some back. That arrangement is laid out in the attorney drafted separate agreement I referred to in item 2) of my comment #25.

35. Comment from Rhonda Porter
Time September 6, 2008 at 9:35 pm

With qualifying for FHA (or any mortgage) sometimes not all the income can be used–perhaps the spouse changed their line of work or the way they were paid…maybe they just started receiving bonuses…so sometimes ratios being pushed is more acceptable than others (two people scraping to buy all they can w/no other obvious earning potential).

36. Comment from ARDELL
Time September 6, 2008 at 9:41 pm

Sniglet #10

Yes, it’s a forced savings. In the old days, like in my neighborhood, the people doing these had tons of kids. Every “extra” dollar found a mouth to fill. Large and poor families like mine NEVER had “extra” money. My parents never leased from the time I was 3 or so. Before that I think they did. I’ll have to ask my Mom.

I know my next door neighbors with 6 kids bought their house this way and many others in the neighborhood too. It was a way for those who did well in this Country to help other people in a “paying back” kind of way.

I did something similar with one of my clients a few years back with a short “seller carry” 2nd. There was no reason for the seller to do it. It was a hot market. But you know what? There’ are some really nice people in the World. There really are. Go figure?

37. Comment from Sniglet
Time September 6, 2008 at 9:43 pm

What happens if the lenders refuse to fund the deal when they try to close as contractually stiupulated (one or two years after signing the option-purchase agreement)? Would the buyer just forefeit all the money they had paid throughout the time of the lease?

Can these agreements be made subject to financing? If so, then maybe these lease-purchases would be a good hedge for buyers. If real-estate prices keep declining you have a get-of-jail free card.

38. Comment from ARDELL
Time September 6, 2008 at 9:44 pm

Rhonda,

Well I’d still say $80,000 in my example. I don’t want everyone thinking a 40% front end is OK. Most people have at least one car payment and some two. We don’t want them eating hot dogs and beans for 30 years.

39. Comment from ARDELL
Time September 6, 2008 at 9:52 pm

Sniglet,

In my example it takes 10 months or less. Usually these are for 12 months or less and often for 6 months. You are only accumulating the FHA required downpayment, which is 3% or actually a little less. The tenant/buyer should have a pre-approval except for cash to close before entering into the agreement. The lender is processing the loan from day one and it closes as soon as the money is accumulated.

It really is a purchase with a long close.

No they are not subject to financing. If it is that “iffy” and you need two years or a Finance Contingency, then you go with a Lease with an Option to Buy, which I do not recommend at all at this time, unless…

Some people really do not want to move again. Often people with elderly or handicapped family members or pregnant women. Yes, buying six month’s ahead of time backs you up six months as to price considerations. But for many people that is the least of their concerns.

If you have lots of kids and pets, you just want a home, and if this is the way to get it. 2% of price this way or that is not a big issue for most people.

40. Comment from ARDELL
Time September 6, 2008 at 9:53 pm

PS to all,

When I started in real estate 120 day closes were NORMAL. These 30 day closes are really a recent event. Many people used to save money during the contract.

So do you know why closings are most often 30 days and why and when that started?

41. Comment from Sniglet
Time September 6, 2008 at 10:08 pm

Ardell wrote: “In my example it takes 10 months or less. Usually these are for 12 months or less and often for 6 months.”

So, what happens if at the end of 10 months the value of the property has dropped substantially? Will FHA still fund the loan for the original agreed price? If not, what happens?

42. Comment from ARDELL
Time September 6, 2008 at 10:16 pm

It’s a valid point Sniglet, but there are all kinds of monsters in the dark closet if you want to “go there”. King County prices are down what? 6%-7% or so since peak. Do you know how many people overpay for a house by 10% every day without knowing it? Do you know how many people overpaid by 20% or more during the days of the bidding wars?

If we want to play a bunch of fearful “what ifs”…well lets go all the way.

1) What if interest rates go up and the buyer doesn’t qualify at the new rate (that’s why I wasn’t pushing on the ratios Rhonda)

2) What if it’s a married couple and they file for divorce by the time it’s supposed to close?

3) What if the man comes home and finds his fiance in bed with his best man, does he still have to close escrow?

4) What if the house is burglarized, and the buyer finds out that is why the seller moved out in the first place and didn’t disclose it?

5) What if the buyer wins the lottery and wants to buy in Hawaii instead?

6) What if McCain is elected president and the buyer is drafted into the service two days after the Inauguration?

43. Comment from ARDELL
Time September 6, 2008 at 10:33 pm

Sniglet,

I’m using a tradtiional example, but if you are worried about prices, and I don’t blame you, there’s no reason you can’t structure it differently.

You can ask for ALL of the rent to be applied against the purchase price. That might give you a cushion as to values going down. Get creative!

44. Comment from Rhonda Porter
Time September 6, 2008 at 11:06 pm

Ardell, I don’t want to mess w/your example at all my only point was to let readers know that FHA’s ratios and guidelines may not be as strict as they think. I’m always pleased when buyers choose their mortgage payment by their comfort level and goals rather than push themselves to the financial limit.

45. Comment from ARDELL
Time September 6, 2008 at 11:17 pm

Rhonda,

Given a Lease Purchase is a longer close, the seller should not let the criteria other than cash be pushed to the limit. Also, without a Finance Congtingency, the buyer shouldn’t either.

There should be room for movement given the extended timeframe.

Speaking of which, I heard that some people are starting to put rate caps into the contract. Most other areas have a rate cap in the Finance Contingency to cover buyers in the event interest rates rise by 1/2 to 1 point before close of escrow.

46. Comment from ARDELL
Time September 7, 2008 at 7:49 am

Rhonda #33,

Yes, that is typically called a “land contract” even when it is not about vacant land. But I think the buyer would be better off with a “seller carry” in that case.

47. Comment from ARDELL
Time September 7, 2008 at 8:08 am

Kary,

Lease Purchase = a Seller and a BUYER
Lease Option = a Seller and a TENANT (who may buy)

Lease Purchase is the reverse of a Seller Rentback. It’s a Buyer Rentforward.

48. Comment from Kary L. Krismer
Time September 7, 2008 at 8:09 am

Ardell wrote: “There is a HUGE difference. In a lease purchase there is no option money and there is no option to NOT buy the house, same as any purchase. In an “option to buy” you are buying the option with the option money and have no obligation to purchase at all.”

But they have the “option” of defaulting on the purchase and sale. That makes it basically the same if the only remedy is the forfeiture of the extra money paid in. And I don’t think that would be considered a “foreclosure” for purposes of answering future loan applications (unless that is in fact what the seller has to do if they don’t move), and most likely not credit reported, so it’s basically the same thing both legally and practically.

49. Comment from Kary L. Krismer
Time September 7, 2008 at 8:12 am

Sniglet wrote: “Really? My understanding was that historically rent prices were virtually the same as purchase prices (if not higher). It has only been in recent years that the costs of home-ownership exceeded the cost of renting.”

I don’t think that’s correct, at least when you compare apartments to condos. It was only the last few years that owning was as cheap as renting. Not sure about houses, but I suspect the same thing is true there.

50. Comment from Kary L. Krismer
Time September 7, 2008 at 8:14 am

Ardell wrote: “Your #8 is a “Lease with an Option to Buy, not a Lease Purchase”. If someone welches on a deal in a Lease Purchase, he’s a cheat and a liar and a stinker, not a smart businessman. If you want an “out” then be honest up front and ask for a “lease with an OPTION to buy” not a Lease Purchase. A Lease Purchase is the same as any purchase contract and you are expected to proceed “in earnest” and “in good faith”.

So I guess that means when you represent a seller you’ll recommend accepting a $500.00 earnest money on a $1,000,000 house, because it’s all about acting in good faith and honoring your commitments, right?

51. Comment from ARDELL
Time September 7, 2008 at 8:15 am

Sniglet: “Would the buyer just forefeit all the money they had paid throughout the time of the lease?”

There is a limit to the max amount a seller may keep as forfeited Earnest Money in the State of Washington. So no, the seller may not keep “all of the money” if it exceeds that limit.

52. Comment from ARDELL
Time September 7, 2008 at 8:36 am

Good morning, Kary! I was catching up on comments while everyone was sleeping

Kary #48 - No, it would not be a foreclosure. It would be the same as anyone defaulting on a Purchase and Sale Agreement. No “buyer” should enter into a Lease Purchase intending to possibly default. In fact the remedy in a Lease Purchase should be Seller’s Damages and not merely “liquidated damages” due to the extended timeframe and wear and tear on the house.

Almost 100% of purchase contracts have a “forfeiture of Earnest Money” and “liquidated damages” as the option chosen. For Lease Purchase agreements, often liquidated damages is insufficient and the seller should reserve the right up front to real and proven damages. This would make the buyer responsible for the difference between the eventual sale price and the contract sale price.

Kary #49 - Sniglet is correct if you consider most of the Country and not simply West Coast. That’s where all the “Buy vs. Rent” tables came from. It was cheaper to buy on an after-tax basis, and still is in parts of the Country.

Kary #50 - It is the agent’s job to convey the true intent and meeting of the minds via written contracts. If you know the intent is to Lease with an OPTION to buy, and you write up a Lease Purchase instead, then both the buyer and the seller should sue you if the buyer defaults saying “Kary said it didn’t matter and I had the “option” to default.”

When I’m writing a contract and the buyer says “how do I get out of this” while I’m still preparing it, I STOP dead in my tracks. No one should make an invalid offer, and no agent should proceed with writing an offer when there is already buyer remorse before they sign the contract. Yes, there are legal outs, but they should not be used for “changing my mind about buying”.

You seem to be saying the buyer can just SAY they are buying…but decide later. Not so. That’s a Lease Option NOT a Lease Purchase. The seller has the right to know up front what the real intention is so he can make an informed decision.

53. Comment from Kary L. Krismer
Time September 7, 2008 at 8:38 am

5% is the limit for forfeiture of earnest money being the remedy, per the NWMLS forms. I believe that’s consistent with state law.

54. Comment from Kary L. Krismer
Time September 7, 2008 at 8:45 am

Ardell wrote: “Kary #48 - No, it would not be a foreclosure. It would be the same as anyone defaulting on a Purchase and Sale Agreement.”

This gets back to my question for Craig in post 4. My recollection is that if you let someone into possession earlier than closing, that in some situations the remedy to get them out is foreclosure (or technically forfeiture), because they’re in possession under a contract, not a rental agreement. That raises the question of what happens if they’re in possession under both? I would never consider having a seller client allow a buyer in early without consulting with a real estate attorney on that issue.

From the buyer’s side it’s not such a risk, in that they can avoid the foreclosure (forfeiture) by simply moving out. But from the seller’s side it would be a great risk. Real estate contracts to purchase have been out of favor so long I don’t remember the remedies for certain, but I think they basically parallel the foreclosure process. Add in the buyer filing bankruptcy just prior to the sale, and the seller could be caught up in this mess for 6 months or more–with no payments and no ability to sell. Absent case law that explicitly deals with the issue, and rejects the need for a forfeiture, I’d be very reluctant to enter into such a deal as a seller.

55. Comment from ARDELL
Time September 7, 2008 at 8:47 am

Kary #53.

Thanks Kary, but let’s also make it clear that if the remedy checked is seller’s damages, as it should be, then that limit will not apply. Also, an option cost can exceed the statutory limitation for forfetiure of earnest money.

If you want to rent and “maybe” buy…then pay for that option. Don’t pretend you are buying if you are reserving the right to not buy, at the time you sign the purchase agreement.

56. Comment from Kary L. Krismer
Time September 7, 2008 at 8:48 am

Ardell wrote: “Almost 100% of purchase contracts have a “forfeiture of Earnest Money” and “liquidated damages” as the option chosen. For Lease Purchase agreements, often liquidated damages is insufficient and the seller should reserve the right up front to real and proven damages. This would make the buyer responsible for the difference between the eventual sale price and the contract sale price.”

Well that would be a good reason for the buyer never to enter into such a contract. Being subject to election of remedies for even a 45 day closing would be very risky.

57. Comment from ARDELL
Time September 7, 2008 at 8:50 am

Kary said: “I would never consider having a seller client allow…”

Never say never Kary. Look at Florida with whole neighborhoods full of empty houses and six foot tall grass. In an extended bad market, agents need to look at what is best for their client, and often some money in hand is the lesser of two evils.

58. Comment from Kary L. Krismer
Time September 7, 2008 at 8:51 am

Ardell wrote: “Yes, there are legal outs, but they should not be used for “changing my mind about buying”.

I’m talking about the non-legal out–default. Assuming they could somehow perform still (get financing) if the values in the area fell 20%, I think it’s unlikely to assume many people actually would, if the option was walking away from $7,500.00.

Lots of people say they will honor their commitments, but few do when push comes to shove. Back in my bankruptcy days very few people had interest in Chapter 13 (repayment) when there wasn’t a benefit to them, such as saving a house, paying taxes, etc. I’d put the number at less than 5%.

59. Comment from Sniglet
Time September 7, 2008 at 8:53 am

Kary wrote: “It was only the last few years that owning was as cheap as renting”

Huh? Owning hasn’t been as cheap as renting for a LONG time. Certainly the costs of renting either condos or single family homes in the Puget Sound has been LOWER than the costs of ownership for at least the last 10 years. The only way a rental property has been able to pencil out for a landlord in the last 10 years is to count on appreciation.

60. Comment from Kary L. Krismer
Time September 7, 2008 at 9:04 am

Just to follow up on the risk, with an election of damages remedy in one of these things, I’d compare this type of transaction to writing a call option on stock, or perhaps just dealing with stock options in general.

The difference between buying a stock, and dealing in options is that with options your time frame is limited. If you own the stock and it falls 20%, you do have the ability to simply ride it out and see if the value returns. That is similar to owning a house. Many/most people really aren’t affected by the rise and fall in house values, because they have no intention of selling in the foreseeable future.

But if you enter into certain stock option transactions, your gain/loss is determined at a certain point in time. There have been some very wealthy people completely wiped out by a wrong move in options. And the same could happen to someone entering into one of these transactions on a house, because if the values fell and they couldn’t perform (and a financing contingency was not applicable for some reason), their loss would be practically set in stone the day of default. They’d have no ability to just ride out the market. Even if they could still afford the higher monthly payments (the substituted mortgage payments), they’d be facing a huge loss. I wouldn’t recommend that for the type of person described as the buyer in the original scenario.

61. Comment from Kary L. Krismer
Time September 7, 2008 at 9:05 am

Sniglet wrote: “Huh? Owning hasn’t been as cheap as renting for a LONG time.”

About 2-3 years ago we started losing a lot of tenants to condos, because the financing options were so cheap. That was something new.

62. Comment from ARDELL
Time September 7, 2008 at 9:09 am

Sniglet,

Where land value is significant, owning is never as cheap as renting. An Ocean Front property in CA as example. Renting the structure on an unobstructable view property is never more costly than the mortgage payment, nor should it be. The limited commodity of oceanfront property will always rent for less than it costs to own it.

A run of the mill condo across from Microsoft used to sell for $79,000 and rent for $650 not very long ago. Rent vs. Buy almost never worked for a 3,000 sf house. It almost always worked for a one bedroom condo on an after tax basis. Remember you can write off the real estate taxes and almost all of the monthly payment in the first years of ownership. So you have to look at the net cost and not the gross monthly payment.

63. Comment from ARDELL
Time September 7, 2008 at 9:12 am

Kary,

You are still not looking at this right. LEASE PURCHASE IS THE SAME AS PURCHASING IT TODAY! except you close later. What happens if you go buy a house cash today and prices change in six months? Same for Lease Purchase. Lease Purchase is buying a house, not renting with an option to buy later.

64. Comment from Kary L. Krismer
Time September 7, 2008 at 9:30 am

Ardell, I think I already answered your post 63 with post 60.

You’re suggesting a transaction that would be very risky to the buyer if it’s an election of remedy transaction.

This sort of reminds me of the ploy of a seller paying points to get the buyer a reduced interest rate, in lieu of reducing the price. Sure that’s great for the seller, but it doesn’t always make sense for the buyer. I’ve not exactly figured out a good way of doing the calculations on that, but I think it only makes sense financially for the buyer when they keep the same property and loan for something around 10+ years. Now it might make sense for them if they really love and or need the house, and monthly payments rather than value is the only issue, but it’s really a bad move overall absent significant future appreciation.

65. Comment from Tim
Time September 7, 2008 at 9:33 am

a buyer needs to structure the lease option with future value in mind.

66. Comment from Kary L. Krismer
Time September 7, 2008 at 9:39 am

Tim, I sort of touched on that in post #3 above–the “First” point. What Ardell refers to as a lease option typically would have a premium, but I don’t think these would.

But the problem is, sure you can factor in future value–the problem is what happens if you’re wrong!

67. Comment from ARDELL
Time September 7, 2008 at 9:47 am

Kary and Tim,

Here are the choices.

1. Rent - don’t buy
2. Buy - don’t rent
3 . Lease purchase
4 . Lease with an option to buy

If you are sure that prices are going down and you don’t need to own now, then you would be at choice #1!!!!!!!!!

If you are sure that prices are going up, could be true somewhere in this Country, but I don’t know where, then you would choose #4 with a significant penalty to the seller if he doesn’t honor the option price.

If you have to move out of your current rental, and you do not want to be tossed on the street again by a landlord and so want to buy today, but you don’t have the cash to buy today, then you choose #3.

If you just took a new job and don’t want to make a commitment, but want the right to stay and buy and not move after you get acclimated in your new place, then you choose #4

What you DO NOT do, Kary is PRETEND to be doing #3 when you are really doing #4!

Here’s were the agent “predicting” what is most likely to happen with prices comes in very handy Kary!!!!!!!!!!!!!!!!!!!!!!!

You always say agents shouldn’t predict, but you are dead WRONG on that.

I predict prices are going down…that helps my clients make the right choice from the get go. You act like you can’t tell, so your clients have to look for a bunch of loopholes. That’s were what “we used to be” before we were agents makes a HUGE difference.

68. Comment from ARDELL
Time September 7, 2008 at 9:49 am

“a buyer needs to structure the lease option with future value in mind”

Not quite Tim. A consumer needs to have a future value in mind before deciding where to be a buyer or a tenant.

69. Comment from Sniglet
Time September 7, 2008 at 9:57 am

Ardell wrote: “Where land value is significant, owning is never as cheap as renting”

Maybe not in the last 20 years, but for most of history owning and renting were about equivalent. We have seen a historically abnormal rise in property prices since WWII (and particularly since the mid ’90s) that throws all these traditional measures off kilter.

70. Comment from ARDELL
Time September 7, 2008 at 10:02 am

Sniglet,

My only regret in life is that I did not buy oceanfront property in 1972 I should have stayed in my Mom’s house until I married in 1983 and bought oceanfront property in Manhattan Beach CA with every dime that I earned. Of course I only know that due to hindsight. If I had a time machine…that is what I would do.

71. Comment from Jillayne Schlicke
Time September 7, 2008 at 10:04 am

Hi Ardell,

Forgive me if this was already covered in the comments (busy day for me today) but my concern is financing. If the loan will not closing for a few months, what happens if interest rates go up or underwriting guidelines tighten?

Thanks!

72. Comment from ARDELL
Time September 7, 2008 at 10:19 am

Jillayne,

There are 3 pieces to a Lease Purchase as detailed in my comment #25 item 2), but I’ll repeat them here for everyone’s benefit.

1) You write up a purchase agreement as if you are buying today with a long closing. When I started in the business many closings were 120 days, not the 30 day BS agents push today. So covering many bases is not all that hard to do. Just not common practice anymore.

2) You write up a lease agreement the same as if someone is leasing as of today, you just have the right to cancel at time of purchase without penalty.

3) An attorney writes up a melding agreement with the “what ifs” and the agent outlines those and the parties agree to the consequence of potential what ifs.

As to interest rates, almost ALL other areas have an out if the rate exceeds X (fill in the blank) WA used to have that and took it out of the Finance Contingency. If they had not done that, people would have had a right to cancel if the rate was subprime vs. A Paper. Whomever took out that rate cap in the NWMLS Finance Contingency is largely responsible for what is happening to people right now, and should be hung at high noon.

73. Comment from ARDELL
Time September 7, 2008 at 10:31 am

Jillayne: “If the loan will not (be) closing for a few months, what happens if interest rates go up or underwriting guidelines tighten?”

More succinctly, the example is based on an FHA transaction, as the cash needed is minimal and suits Lease Purchase scenarios best.

Per my discussion with Rhonda, I used $80,000 as the income vs. $60,000 to allow stretch room in the event interest rates change modestly. A rate cap should be inserted for a minimum of a 1/2 point spread and a maximum of a 1% spread. That’s a negotiation.

That covers both issues. If guidelines are tightened…no sweat. You don’t do these stretching to the max allowable as to approval guidelines, and you don’t do these if the buyer wouldn’t qualify if interest rates shifted by up to 1% and you give the buyer an out if rates, and possibly prices, shift dramatically prior to close of escrow.

For those who worry about prices falling, as well you should, all you have to do is a “must appraise” clause to be invoked no later than two weeks prior to close of escrow.

The “what ifs” are many and varied depending on the needs of both the buyer and the seller and the specifics of the property. Expert advices are needed to construct these.

Like I said in the post “WARNING: Lease Purchase NOT “done well” could end up being just Another Brick in the Wall in the long run, so don’t try this at home without expert guidance including an attorney drafting the governing documents.”

The difference between an agent in 2004 and an agent in 2008 is this…you better know your shit if you plan to stay in this business. Being able to fog a mirror is no longer the criteria for doing this job well. The best agent couldn’t help a buyer in 2005 because the market wouldn’t let them. It was “buy or get the hell out of line” time. Not so now. Really good agents are needed by both buyers and sellers right now. The good news is they are available at the same price as the crappy ones

74. Comment from ARDELL
Time September 7, 2008 at 10:54 am

Kary,

In 2004 and early 2005 I counseled people to make decisions based on the expectation that the market would go up in the short term. In 2008 I counsel people to make decisions based on the expectation that the market will go down in the short term.

Agents MUST be able to PREDICT or they are not worth what they are paid. Pure and simple fact. You don’t pay a stock broker to put stock names on a board and throw darts…do you?

Anyone who is a professional in a moving market MUST have some predictive “powers” or hire someone who does. OR…they can do as Craig does. Charge a small flat fee and say price issues are your problem, pal.

When people ask me what the value of the house will be in five years, in ANY market, I look at them like they have two heads and tell them if anyone has an answer to that question RUN!!!

Lease purchase is ideally for a 4 to 10 month timeframe and treated the same as if the buyer is buying today. If the buyer isn’t buying today…then they are renting. No problem. Just be honest with the seller from the getgo. All agents must be honest with all parties to the transaction. Do not write up any kind of “purchase” contract for someone who isn’t really buying at the time they sign the contract.

75. Comment from Kary L. Krismer
Time September 7, 2008 at 3:41 pm

Ardell wrote: “What you DO NOT do, Kary is PRETEND to be doing #3 when you are really doing #4! . . . Here’s were the agent “predicting” what is most likely to happen with prices comes in very handy Kary!!!!!!!!!!!!!!!!!!!!!!!. . .
You always say agents shouldn’t predict, but you are dead WRONG on that.”

First, you apparently don’t even understand what a prediction is. I’m not making a prediction. I’m stating what a buyer’s choice would be.

Second, I don’t say agents shouldn’t make predictions—well okay I do. I say agents shouldn’t make predictions because they CANNOT make predictions. No training, no skill, insufficient data, etc.

76. Comment from Kary L. Krismer
Time September 7, 2008 at 3:44 pm

Ardell wrote: “I predict prices are going down…that helps my clients make the right choice from the get go. You act like you can’t tell, so your clients have to look for a bunch of loopholes. That’s were what “we used to be” before we were agents makes a HUGE difference.”

Actually, based on the fact that you don’t see the risk to the buyer in the transaction you suggest, I find it somewhat amazing that you used to be involved in stock brokerage.

Where’s the suitability for someone to enter into a risky transaction where they don’t even have the asset base to make a 3% down payment?

This thing may work for certain sellers, but I don’t see it as a viable option for any buyers. And if any one is going to try it, they should consult an attorney, including having an attorney review any financing contingencies.

77. Comment from Kary L. Krismer
Time September 7, 2008 at 3:46 pm

Sniglet wrote: “Maybe not in the last 20 years, but for most of history owning and renting were about equivalent. We have seen a historically abnormal rise in property prices since WWII (and particularly since the mid ’90s) that throws all these traditional measures off kilter.”

Three words: Two income households.

78. Comment from Kary L. Krismer
Time September 7, 2008 at 3:49 pm

Ardell wrote: “When I started in the business many closings were 120 days, not the 30 day BS agents push today.”

Okay, I give up. Just why do you think 30 days closing are BS? Maybe you should just do short sales!

79. Comment from rob
Time September 7, 2008 at 3:55 pm

Thanks Ardell that definitely is one to dust off and use.

Let me ask you Ardell. Do you get a title report up front? Who holds the above market rent money? Do you use a third party to pay any underlying note(s)?

I have used lease purchases in the past but not for the purpose of saving for an FHA down payment (btw it goes to 3.5% Oct 1). I have used them while the buyer was dealing with other items, like job seasoning… The above market rent is what keeps the buyer in the game, I like it.

80. Comment from Kary L. Krismer
Time September 7, 2008 at 4:01 pm

Isn’t this entire discussion a bit academic. How many people are there out there that don’t have 3% now, but could have 3% in 10 months?

Rob, of course you’d get a title report first. The buyer would be foolish not not.

Good question on the who holds the money. At a minimum I think it would be required to be held in a separate account, like a rent deposit, but really it should probably be held by an escrow. I wonder if you could get the same escrow to pay the mortgage and taxes? That would be best because absent that it would be yet more risk for the hapless buyer.

81. Comment from ARDELL
Time September 7, 2008 at 7:13 pm

Kary said: “I’m not making a prediction.

I know. You should. That’s the point.

82. Comment from ARDELL
Time September 7, 2008 at 7:16 pm

Kary said: “This thing may work for certain sellers…”

Again, that’s the point. See post Title. It’s about selling property, owners, and bolstering market prices. The people who aren’t buying don’t need “a Savior”…the market and the sellers do.

83. Comment from ARDELL
Time September 7, 2008 at 7:18 pm

Kary,

Re “two-income households”.My Mom always worked and our house didn’t go up in value

84. Comment from ARDELL
Time September 7, 2008 at 7:20 pm

OK, I’m up to comment 78.

Mostly it’s because agents don’t like to wait too long to get paid. It really isn’t all that realistic of an expectation for everyone to be writing 30 day closings on most contracts, regardless of the seller’s circumstances.

But maybe the % of 30 day closings isn’t as high as I think it is. I’ll ask Tim.

85. Comment from ARDELL
Time September 7, 2008 at 7:41 pm

Rob,

You do everything the same as you would do with any lease and any purchase and sale, both.

Since the attorney has to draft the melding contract stipulating how much would be forfeited as Earnest Money, etc, I would think the attorney could collect the monthly, pay the seller their Fair Market Rent Portion and hold the rest in escrow pending the closing.

I haven’t found the kind of real estate attorney (one that represents the transaction and not either party) here in Seattle. There were scads of them in PA where I did these in the last bad market. Here it seems everyone expects everything to be “adversarial”.

86. Comment from Rhonda Porter
Time September 7, 2008 at 9:18 pm

Kary, I’m afraid I know of people who currently were foolish not to get a title report…amazing to me, but I come from that industry…but this stuff does happen when “professionals” are not involved.

87. Comment from Rhonda Porter
Time September 7, 2008 at 9:23 pm

Ardell, I know I”m jumping back a bit…but…it’s a weekend and we were running around w/our kids…this is from comment 40: “When I started in real estate 120 day closes were NORMAL. These 30 day closes are really a recent event. Many people used to save money during the contract”

Saving money during the contract is fine and dandy; HOWEVER underwriters (especially w/FHA) will want the money to be “seasoned” (this means showing that it’s been in your bank account, ususally for at least 30-60 days w/out large deposits).

When I have buyers providing me bank/asset statements without the down payment and they tell me “I’m going to get paid on it” or “it’s coming” THIS COULD BE A RED FLAG.

88. Comment from ARDELL
Time September 7, 2008 at 9:40 pm

Rhonda,

I’ll change that to “would CONTINUE to save money during the contract” If the buyer can pay the higher amount for 6 to 10 months, it really is a good start and everyone knows they can handle the payment before they make the long term commitment. Everyone including themselves. It’s not a bad plan. They don’t have any moving costs at the same time as the closing. It can be a very smooth and satisfying event for all concerned.

Just like Contingent sales, it is expected that the buyer may pay a little more for the house with these terms than if they were cash buyers. That’s just the leverage issues of negotiation. Still for many who are “missing” the zero down loans, this could be an alternative method of purchase.

I’m doing Sunday Night Stats with my right hand while I’m doing this comment with my left hand, and sales are down more than 50% in Tacoma and Federal Way. There are 46% more homes for sale than have sold since the first of the year. There is almost a full year’s supply of inventory on market right now. There are many people who can’t buy now in areas like this where home prices would fit into FHA guidelines.

I’d rather see someone test that monthly payment before buying, using Lease Purchase as “a trial run”, than bite off more than they can chew. That peace of mind is clearly worth something. It’s not for everyone, but it should be one of the options for buyers and sellers in this market.

89. Comment from Rhonda Porter
Time September 7, 2008 at 9:48 pm

Ardell, I’m w/you 100% on having someone test their payments before they buy. In fact, I’ve written about potential buyers paying themselves first (w/the mortgage payment) before actually making a mortgage payment. The last thing in the world I want is for someone I’ve helped with a mortgage to come back to me because they cannot make ends meet.

90. Comment from ARDELL
Time September 7, 2008 at 9:56 pm

Rhonda,

The key is to have the mortgage professional basically take a full application before the buyer enters into the purchase agreement. There should be room for things to change and the only issue for full approval should be the cash issue.

It works well for people who are being tossed from their current rental, and are motivated to buy so that they can’t be asked to leave their “home” again. They may not have saved money to buy because they didn’t intend to leave their current home that they are renting.

A lot of people who were displaced by condo conversions would be candidates for this method of purchase.

91. Comment from Kary L. Krismer
Time September 8, 2008 at 7:04 am

Ardell said: “Kary said: ‘I’m not making a prediction.’

I know. You should. That’s the point.”

Ardell, unlike you, I don’t do things that I have insufficient training for and insufficient access to data. And in case you’ve forgotten, I’d support an ethical rule or statutory change that would prevent agents from making predictions. I consider agents making predictions to be part of the problem, not some sort of solution.

The problem with your comparison to stock brokers is most don’t actually make predictions. They rely on what their firm’s gurus say. And most of those gurus are wrong. But in any case, they rely on a lot more data than past stock charts and a hunch, which is basically all any real estate agent making a prediction does. Which makes agents even more likely to be wrong than the stock gurus, most of which are wrong.

So tell me, why should agents give their clients worthless information (predictions)?

92. Comment from Kary L. Krismer
Time September 8, 2008 at 7:11 am

Ardell wrote: “Re “two-income households”.My Mom always worked and our house didn’t go up in value :)”

Huh? I don’t know what that means. My mom always worked too. Even back in the 60s.

But just where does your mom live that her house didn’t go up in value. I’d guess our house in Bremerton probably cost about $10,000 in the early 60s. Per Zillow it’s worth about $250,000 today. So just in what kind of “In the World Time Forgot” place does your mom live?

93. Comment from Kary L. Krismer
Time September 8, 2008 at 7:16 am

Maybe the 120 close explains why short sales take so long. Banks are living so far in the past that they don’t realize how out of date they are!

Any vacant property would probably prefer a 2 day close. People looking to buy after they sell a 60 day close. There is not a single number that works for everyone, but I can’t see that many people would be happy with a 120 day close.

Stated differently, I don’t think it was just agents that would have called for such a change.

94. Comment from craig
Time September 8, 2008 at 10:00 am

Sorry for being so late to the party! You guys are amazing “weekend warrior” bloggers!

Here is my two cents: I’m having a hard time wrapping my mind around the transaction. It sounds like there would be a lease for an indefinite term equal to the closing period or, I guess, terminating upon buyer’s default under the PSA. Thus, there would also be a PSA. So, the buyer would be a tenant as well, and the seller would be a landlord. The WA Residential Landlord/Tenant Act specifically exludes from its scope this very situation, so I guess the obligations between the parties would be governed by the common law, which would certainly introduce some ambiguity. I don’t think that this would constitute a means of financing and therefore be considered a real estate contract (the term used in WA that equals Ardell’s “land contract”) but I’m not certain. If so, then there would be legal implications for any default and subsequent remedy by seller.

Ultimately, I would need to think and research long and hard before I was comfortable even weighing in definitively on the subject, let alone drafting the documentation to make the transaction happen. Speaking of which, no attorney in his right mind would “represent the deal” under these circumstances. While things are not always adversarial, they ALWAY have the potential to become adversarial. That is why an attorney must represent only one party. With all of the uncertainties here, it would be essential that a lawyer represented only one party in order to competently represent that party and protect her interests.

Ultimately, I tend to agree with Kary. This seems all rather academic and unlikely to actually be necessary. One of the biggest benefits accrues to the market and not to either party: propping up of prices. That benefit in no way justifies the cost and possible risk in making this transaction happen. The buyer could rent a place and save their own money rather than being compelled to have the seller save it for them. If the buyer is incapable of managing their finances in order to save the money, are they really a good potential tenant, particularly where the landlord would be operating outside of the RLTA?

95. Comment from Kary L. Krismer
Time September 8, 2008 at 10:22 am

I did some looking, not complete by any means, and I found this on real estate contract forfeitures:

RCW 61.30.010 Definitions.

(1) “Contract” or “real estate contract” means any written agreement for the sale of real property in which legal title to the property is retained by the seller as security for payment of the purchase price. “Contract” or “real estate contract” does not include earnest money agreements and options to purchase.

Assuming the forfeiture act carries through and only covers “contracts” I don’t think this type of situation would be covered by this act.

I assume Craig’s recent post refers to this:

RCW 59.18.040 Living arrangements exempted from chapter.

(2) Occupancy under a bona fide earnest money agreement to purchase or contract of sale of the dwelling unit or the property of which it is a part, where the tenant is, or stands in the place of, the purchaser;

I’m still not clear on how an owner would terminate this agreement if the buyer failed to perform and also refused to move, but seemingly this would be another risk for the buyer–they wouldn’t have the protections of the landlord tenant act as to things like repairs, etc. Presumably the contract would have to spell that out too.

96. Comment from ARDELL
Time September 8, 2008 at 11:05 am

Craig,

I too was surprised by “the party” that ensued. I wrote the post to enter into this week’s Carnival of Real Estate with a Sunday deadline (and won a Gold Medal in the Buttyfly Event as a result”.

“It sounds like there would be a lease for an indefinite term equal to the closing period or, I guess, terminating upon buyer’s default under the PSA.”

The lease would extend beyond the close date in the Purchase and Sale Agreement, which would be an “on or before” close date to actually close as soon as it ca. The lease would simply free the “tenant” who would become the owner, without penalty under the lease agreement for early termination of the lease.

So the lease would end not at default of the PSA, it would end at the completion of the PSA. The “seller” would have to be happy with the idea that it could end up a simple lease agreement if there is a default on the PSA.

I have several clients like this who are as happy to rent as to sell, as long as they can get money to help defray the holding costs. There are many sellers in this situation. That is why the “meeting of the minds” is so important. If the owner does not want to rent under any circumstances, only wants to sell, this method would not apply. If the the owner wants to rent OR sell, preferably sell, then this works.

The defaulted or cancelled PSA would simply expire out and the lease would stay in place. That is why they need to be two separate stand alone agreements.

97. Comment from ARDELL
Time September 8, 2008 at 11:22 am

Craig,

I believe you will readily see why the tide shifted to purchase being the main event, and not the lease portion. Forms are more agent serving when they lean more heavily toward a sale culminating at the end, rather than a lease. When the owner doesn’t much care one way or the other, and many will “rent or sell” either, this makes more sense for the seller consumer than for the agent. Agents began using lease purchase to SELL. Owners used them to rent and sell or rent OR sell, being equally happy either way.

From the buyer side of things, we meet many people who just don’t know how to put it all together to be a homeowner, who have been renting for many years. Every day I meet a single 40 something who needs the process of buying to be more of a transition than an “event”.

It’s not for everyone, but there are many, many people for whom this type of help is the only way they will ever become homeowners. It truly is a win-win for all when it works well. And when it doesn’t work well, usually the only person damaged is the agent. I believe this is one of the reasons they were replaced with options that provided a higher possibility of the agent ending up with more than just a rental fee. I’m sure you can see the logic in that.

98. Comment from craig
Time September 8, 2008 at 11:33 am

Ardell — I can certainly appreciate why agents would not be too keen on this type of arrangement (although an attorney, who is not paid at closing, would be happy to help — or have I flogged that horse too much already? ;)) I can also appreciate that it would help some potential buyers to become actual buyers. My only concern is the complexity of the transaction and how to best protect my client (whether buyer or seller). With all due respect, I can see either the buyer or seller getting harmed if the deal failed. In fact, the agent is “damaged” only IF the deal goes south and causes some harm to the parties.

99. Comment from Kary L. Krismer
Time September 8, 2008 at 11:49 am

Ardell wrote: “Forms are more agent serving when they lean more heavily toward a sale culminating at the end, rather than a lease. . . . . It truly is a win-win for all when it works well. And when it doesn’t work well, usually the only person damaged is the agent.”

First, I’m not sure you could even get forms to do such a transaction, and if you could I really doubt you’d want to use them. I think this would require an attorney to draft something.

Second, I continue to think you’re underestimating the risk of this type of transaction to the parties. It isn’t only the agent that would be harmed.

100. Comment from