With the low rates we have had over the last several years you would hardly expect for anyone to consider doing a Lease Purchase in lieu of buying. But I am still getting request for properties that offer a Lease Purchase option.
Lease Purchases – The Good
There have been a number of times in the last thirty years when Lease Purchases were a good option for those that needed a little time to increase their down payment, or to repair their credit. In the rapidly appreciating years of the late 90’s and early 2000’s, Lease Purchases were considered a good tool because you could always count on values to go up. This assured the buyer that the home would most certainly appraise for what its Lease Purchase price was, and it assured the seller that the increased value would make it easier for the buyer to secure a loan due to lower Loan To Value ratios. Assuming a two year Lease Purchase on a $200,000 home, you would expect the home to be worth approximately $226,600, assuming an appreciation rate of 5.5%, which was common for many areas of the city, especially the Alpharetta and Johns Creek area that we are in. Add to this the relative ease in getting a loan and you could hardly go wrong with a Lease Purchase.
Lease Purchases – The Bad
Then the 2008 bust. Homes began to decline in value, and banks made it tougher to qualify for a loan. Those that were in Lease Purchases became concerned that if they could not get a loan and they could not close on the Lease Purchase; which is very true. A Lease Purchase is essentially an agreement to buy/sale at an agreed upon price at a future date. And unlike a traditional purchase where a financing contingency is included, Lease Purchases are generally void of a financing contingency. If you can’t get a loan, regardless of the reason, you can’t close as agreed, and if you can’t close your earnest money is probably at risk.
Lease Purchases – The Ugly
As if it were not bad enough, we now have to deal with decreasing values. The impact of this is tremendous. Suppose you agreed to a Lease purchase in 2010 with a sales price of $200,000, and a closing date two tears later. Based on an annual rate of decline of 5.5%, the future value would now be approximately $178,600. Herein lies the problem. You have made your non-refundable earnest money payment, you have saved your down payment, and you have maintained a good credit score, but the home will not appraise for what your contract price is. A BIG PROBLEM.
Lease Purchases – The Solution
Assume that if a home is being promoted as a Lease Purchase that there is a reason, and it is not to help you out. It is probably because the seller can not sell it for what they owe on it, and they are trying to relieve their pain with your money. In today’s market if it’s not worth what they owe on it now, it won’t appraise for what you agree to buy it for in the foreseeable future.
Instead of putting your hard money at risk, be patient, save more money, work on your credit score and continue to rent. In the end you will be glad that you did.
Van Purser is a licensed real estate broker in Georgia. Since1981 he has successfully purchased and renovated over 400 homes. His expertise is in the area of foreclosures, rehabs and fixer uppers. Additionally, he has represented hundreds of clients over the years as a broker with Metro Brokers, RE/Max and now with his own firm. He and his wife, Jeanne, who is also a broker, have been married since 1977. Van can be reached at 770-623-3313 or by email VanPurser@VanPurser.com