The concept is simple enough. You contract to buy a home with a closing date some number of years out, and in the meantime you occupy the premises and pay rent until that closing date. Usually a large sum is deposited with the seller as consideration for the right to purchase. It is also not uncommon for some part of the monthly rent to be applied as a rent credit, which will cumulatively apply as a credit to the down payment on closing day. So each month that passes, the buyer contributes increasing capital, earning greater and greater equity in the property.
It is partly because of this accumulating equity that caveat emptor could not be more applicable in a lease-purchase. Many people attempt such transactions without legal counsel, or even without the assistance of a knowledgeable real estate professional. This could lead to a big mistake. There are many pitfalls in such arrangements—often times not even known to the seller. So it’s not necessarily that the seller is intending to rip off the buyer. They just sometimes become unsuspecting victims of their own life’s trials and tribulations.
Probably the most common pitfall is the possibility of sudden, seller financial instability. If for whatever reason, after entering into the lease-purchase agreement, the seller stops making mortgage payments, the house will eventually be foreclosed by the lender. The lender will not observe your purchase agreement because it is subordinate to their lien. By law, they must assume the lease provisions, but that won’t help for very long. They will surely not take responsibility for either the substantial consideration deposit you made, or the cumulative rent credits earned. You will have recourse against the seller for these sums, but if his financial means are so depleted that he has decided to let the house go, there is probably nothing for you to go after. So good luck with that!
The best way to avoid this particular pitfall is to arrange for an escrow agent to supervise disbursement of your monthly rent payments. You can hire an attorney to do this, or even some real estate brokers will handle this for you. What they will do is receive your rent payments and then make disbursements from those proceeds directly to the seller’s lender, and possibly even remit property taxes as well. You will also want to have the lease-purchase agreement recorded to establish a lien on the property. This way, the owner must satisfy your purchase agreement, and would be prohibited from transferring title out from under you.
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Daniel R. Wilhelm
Residential Management Professional
3 Options Realty
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We use professional market research to determine fair-market rent, and we use broad market advertising to reach a large audience. Our agents will also help you prepare your property and skillfully present your property. Prospective tenants will undergo comprehensive interviews and background screening before we negotiate with them the rental agreement using our proprietary, attorney-reviewed forms.