Lease Purchase Solutions, Ltd.

Frequently Asked Questions



 

 

 

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Frequently Asked Questions About Lease Purchasing

By Jeff Beaubien 
Order "The Lease Purchase Handbook" at www.Lease2Purchase.com 


1. What is a Lease Purchase agreement?

2. Is Lease Purchasing legal?

3. How Does a Lease Purchase Work?

4. How Do I Qualify For a Lease Purchase Home?

5. What are the features and benefits? Why should I use it?

6. Will it work in my area? How about Canada, Australia, or the UK?

7. What is a Sandwich Lease?

8. What are the drawbacks of the Lease Purchase contract?

9. How can I learn the Lease Purchase business?

10. What are the Features And Benefits of a Lease Purchase Transaction?

11. What is the Due-On-Sale clause?

12. The difference between a Lease Purchase and a Lease Option?

13. How much money do I need to start my Lease Purchase business?

14. How much should I charge for rent each month?

15. How much should I charge for the option deposit?

16. How much should I give for the monthly rent credit?

17. How do I protect my option if I am the tenant/buyer?

18. What is the best way to advertise a Lease Purchase home?

19. Why aren't realtors receptive to the Lease Purchase contract?

20. Where can I get a credit report for my tenant/buyer?

21. Should I incorporate my Lease Purchase business?

22. Who carries the insurance on a Lease Purchase home?

23. Who pays the taxes on a Lease Purchase home?

 

 

1. What is a Lease Purchase agreement?

A Lease Purchase Agreement is essentially another name for a Lease Option Agreement. It is a purchasing technique. A lease purchase contract combines a basic lease contract with an option-to-purchase contract. 

In other words it is a lease for a fixed period of time with an option to purchase the property on a future date. The price of the property is usually agreed upon at the inception of the agreement. With a Lease with Option to Purchase, the tenant has the right, but not the obligation, to purchase the property.

This Lease Purchase Contract should be divided into two separate agreements; a Lease agreement and an Option agreement. Many items have to addressed, such as disposition of deposits if the option is executed, and disposition of deposits if the Option is NOT executed.

When a renter signs a lease with an option to purchase that property for a specific price within a certain time frame, that is called a lease purchase. The renter is called a tenant buyer. In most lease-purchase situations, a portion of the rent is applied to a future down payment.

Lease purchases are most popular among buyers who don't have enough funds for a down payment and closing costs.

The tenant/buyer pays to the landlord/seller a non-refundable option deposit that is applied to the purchase price of the home. The tenant/buyer then pays to the landlord/seller a sum that is typical to the rental amount usually on a monthly basis. A portion of that monthly payment is then applied to the purchase price of the home. 

During, or at the end of the lease period, the tenant/buyer has exclusive right to buy the home under the terms to which both parties have previously agreed.

In other words, Lease + Option to Purchase = Lease Purchase

A Lease Purchase contract combines a basic lease contract with an option to purchase contract. It is one of the most powerful ways to sell a home.

Lease + Option to Purchase = Lease 2 Purchase Agreement

The tenant/buyer pays to the landlord/seller a nonrefundable option deposit that is applied to the purchase price of the home. The tenant/buyer then pays to the landlord/seller rent to compensate the landlord/seller for the tenant/buyer's use of the property.

Rent payments are usually made on a monthly basis. A portion of that monthly payment is often applied to the purchase price and/or the down payment of the home.

During the term of the lease, but before the option expires, the tenant/buyer has the exclusive right to buy the home under the terms to which both parties have previously agreed.

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2. Is Lease Purchasing legal?

Lease Purchasing is legal in all 50 United States, Canada, Australia, the UK and any other country which has a free-market economy where lease agreements and option agreements are legal.

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  3. How Does a Lease Purchase Work?


You move into a home that you will lease until you are ready to qualify for a loan to purchase it.  The Option Deposit and rent credits will apply towards the cost of the home which can be applied towards closing costs or down payment.

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  4. How Do I Qualify For a Lease Purchase Home?

One of the main qualifications is a sincere DESIRE to own your own home.  A standard rental application is filled out and reviewed.  You may also want to discuss this commitment with a mortgage advisor to get a clear plan on what it will take to position yourself for a mortgage at the end of the lease term. This may entail correcting credit issues, pay off bills, save for down payment, etc...

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  5. Why should I use a Lease Purchase Contract?

Generally speaking, the Lease Purchase contract is the quickest, easiest and least expensive way to buy, sell or invest in real estate.

It replaces the typical adversarial relationship that usually exists between buyers and sellers with a win-win method of transferring real estate ownership. As a result, it is highly sought after by those who know about its powerful features and benefits.

If you're the buyer you will have minimum cash out of pocket, credit problems are okay, faster equity growth, increased buying power, and peace of mind.

If you're the seller, you will have a top sales price -- even if demand is low, positive cash flow, the largest market of buyers, minimum risk, no realtor commissions, no maintenance, no land-lording and a non-refundable option deposit.

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  6. Will it work in my area?

Yes, it works well in all markets, both hot and cold and is perfectly legal in all 50 United States, Canada, Australia, the UK and any other country which has a free-market economy where lease agreements and option agreements are legal.

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  7. What is a Sandwich Lease?

A Sandwich lease is a leasing arrangement in which an entity leases property from one party and leases that same property to another party. In this arrangement, the entity is both a lessee and a lessor, so it both pays and collects rent on the same property.

Lessee: Is a person or entity, who is also called a tenant, that leases a property from the Landlord (the property's owner or the entity that controls the property.)

Lessor: Is the Landlord (who is either the owner of property or in the case of a Sandwich lease situation is the tenant lessor) who rents the property to another party called a tenant or lessee.

More Information on Sandwich Leases Here

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  8. What are the disadvantages of the Lease Purchase contract?

There are only a few minor disadvantages.

The first (if you are the landlord/seller) is an "equitable title" claim by your tenant/buyer. Any good Lease Purchase course will teach you how to minimize your risk regarding this claim.

The second (if you are the tenant/buyer) is protecting your option. What if your landlord/seller disappears, dies, or decides they don't want to sell? Again, any good Lease Purchase course will teach you how to protect your option.

The third is the infamous Due-On-Sale Clause.

The Due-On-Sale clause is a non-issue. Here's why...

There isn't a single lender that is going to enforce their Due-On-Sale rights on a mortgage that is performing (being paid on time). Why? Because lenders are in business to make money. If they enforce their DOS clause, they are essentially taking back possession of a property in order to sell it, more than likely for a huge loss.

Furthermore, lenders will only enforce their DOS clause for one reason, the payments are late. And if the payments are late, the bank is going to foreclose, not enforce their DOS clause.

The only other reason a lender will enforce their Due-On-Sale rights is if there is a low interest rate loan on the property and the current interest rates are significantly higher.

And remember, as real estate attorney William Bronchick says "there is no Due-On-Sale jail".

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  9. How can I learn the Lease Purchase business?

Unfortunately, you can't learn the Lease Purchase business in any university. Some people offer boot camps, seminars and mentoring. They range in price from $1,000 - $25,000. Therefore, the only way you can learn this business for a reasonable price is to get yourself a good Lease Purchase Home Study course.

You won't find these courses in any bookstores or shopping centers. The only place to get them is on the internet, by responding to a television infomercial or click HERE to contact one of our affiliates that have boot-camps, courses or mentor on lease purchasing real estate .

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  10. What are the Features And Benefits of a Lease Purchase Transaction?

The Lease Purchase contract is the quickest, easiest and least expensive way to buy, sell or invest in real estate. It replaces the typical adversarial relationship that usually exists between buyers and sellers with a win-win method of transferring real estate ownership. As a result, it is highly sought after by those who know about its powerful features and benefits.

Landlord/Seller Benefits

If you don't need much cash up front ($1,000 - $20,000), the best way to get your full asking price and a higher than average monthly rent for your home is to sell it on a Lease Purchase. Since you are offering a huge value and attractive financing to assist the tenant/buyer, they tend to be willing to pay a higher sales price and higher than average rent. Tenant/buyers can easily understand the concept of trading price for time and value.

When you Lease Purchase your home, you receive a non-refundable option deposit. This amount can be as much (or as little) as you wish. You will receive a majority of your profits at closing when, and if, the tenant/buyer exercises their option to buy. You also win if the tenant/buyer defaults or allows the option to expire since option deposit is non-refundable. You can begin the whole process over again by collecting another option deposit from another tenant/buyer.

The earnings potential for the landlord/seller is tremendous since a well-negotiated deal will reap profits at every stage of the game.

Here are some features and benefits for the landlord/seller:

  • Top Sales Price, Even if Demand is Low for Your Home: You attract more buyers who are willing to pay a premium because of the exclusive financing terms and value you're offering.
  • Higher than Usual Rent: Since you are flexible on your financing terms and are offering a tremendous value, you can demand a higher than usual rent.
  • Positive Cash Flow: Since you can demand a higher than usual rent, your positive cash flow will increase.
  • Non-Refundable Option Consideration Up Front/Minimum Risk: When a tenant/buyer executes (signs) a Lease Purchase contract, you receive an non-refundable option deposit that is yours to keep should they default or decide not to buy.
  • No Realtor Commissions: Since you are selling your home by owner, you will avoid paying a 6-10% realtor commission which can add up to thousands of dollars. You will also save on advertising costs because your home will be sold more quickly.
  • Attraction of the Highest Quality Tenants: Because you are renting to tenants who have a vested interest in your home, they think like homeowners and tend to take good care of it.
  • No Maintenance, No Land-lording: Tenants who have a vested interest and believe they are a homeowner may feel a "pride of ownership" that encourages them to pay on time, perform maintenance and make improvements to your home 
  • Tax Shelter is Maintained: Because you remain on the deed until the option is exercised, you maintain all of the tax benefits of ownership.
  • Larger Market of Buyers: You are marketing your home not only to traditional buyers, but also to renters and investors. These three groups make up over 85% of people seeking to buy real estate.
  • No Long Vacancies: When you advertise your home as a Lease Purchase your phone will literally ring off the hook. Typical turnover time is days or weeks instead of months or years.
  • Peace of Mind: It is safer than conventional rentals because of the quality of the tenants and their vested interest in your home. It also means that someone is living on-site who will watch and guard your home against fire, theft, vandalism, etc.
Tenant/Buyer Benefits

If you are in the market to buy a home, you are probably aware of the advantages home ownership provides (tax shelter, appreciation, security, etc). If you are actively seeking homes for sale on a Lease Purchase agreement, you either 

  • cannot purchase a home through conventional means, 
  • are not ready to make a commitment, 
  • are a real estate investor, 
  • are very smart or 
  • a combination of the above.

The Lease Purchase contract provides you with many features and benefits, but perhaps the most powerful one is the rate at which you accumulate equity. Compare any lender's loan amortization schedule to that of a Lease Purchase contract and you'll quickly see that the Lease Purchase contract wins hands-down -- every time. Moreover, the buying power of a Lease Purchase contract can quickly and easily land you a home that you would never qualify for the conventional way.

Here are some features and benefits for the tenant/buyer:

  • Faster Equity Growth: Equity accumulates much faster (five times or more!) than with conventional financing through a bank or lender (See APPENDIX B - Equity Charts).
  • Rent Money is Working Toward the Purchase of the Home: Every month a portion of your rent payment (typically $100-$500, depending on the home) is credited towards your down payment or off of the sales price (See APPENDIX B - Equity Charts).
  • Option Consideration is Credited Towards the Purchase of the Home: When you sign a Lease Purchase contract, you will pay the seller an option deposit. This money is your vested interest in the home and will be fully (100%) credited to you when you buy the home.
  • Minimum Cash Out of Pocket: When you purchase a home conventionally, you must pay at least 5% down plus closing costs and prepaids. When you buy with a Lease Purchase, you only pay first month's rent and a small option deposit. This will save you between 25% and 85% every time you buy a home.
  • Frequently No Down Payment at Closing: Since you have given the seller an option deposit and you have been receiving monthly rent credits, there will frequently be very little or nothing left to pay for a down payment at closing.
  • Profits from Appreciation: Since the sales price is locked in before closing (as specified in your agreement), any increase in property value will mean that your equity (what you owe minus what it's worth) is increasing in the home .
  • Possible Assignment (Sale) of Contract for a Profit: If you are allowed to assign your option (it will be in your agreement), you may assign it (sell it) to a third party for a profit.
  • Increased Buying Power: When you buy a Lease Purchase home, you can put down as little as first month's rent and a $1 option deposit. Compare that to a typical bank or lender who requires 5-20% down plus closing costs and pre-paids.
  • Credit Problems are Okay: Qualification restrictions simply do not exist. You will be approved at the sole discretion of the seller.
  • No Lengthy Escrows or Mortgage Approvals: Your approval will be based solely at the discretion of the seller instead of a lender who can take up to a month (or longer) to render a decision.
  • Control of the Home: You will be put in full legal control of the home for a specified period of time without actually having to own it.
  • No Taxes, Less Liability: Since you do not own the home (yet), you will not have to pay property taxes and your liability exposure will be dramatically reduced.
  • Quick Move In Time: You can typically take possession of the home in less than one week instead of conventional move in times of one to three months after your offer was accepted.
  • Maximum Leverage: You are spending very little (or no) money to control a very expensive, and very profitable, piece of real estate.
  • Time: Before you actually buy the home, you will have 6-24 months (depending on your agreement) to repair your credit, find the best interest rates, investigate the home and research the neighborhood and/or schools.
  • Minimal Maintenance: Large maintenance problems or any maintenance problems that exceed a certain amount of money are delegated to the seller.
  • Privacy: Your name will not be on the deed until you exercise your option to buy.
  • Peace of Mind: You will have full control of the home and can maintain it or improve it however you wish.
Investor Benefits

As an investor, you are probably aware of the principles of leverage (the use of borrowed funds to improve one's capacity and to increase the rate of return on an investment). With the Lease Purchase contract, you can buy (control) properties for literally no money down without using a lender or going through the loan application process. 

Additionally, the Lease Purchase contract is so quick and easy to use, you can significantly increase your productivity and, as a result, your cash flow. You will receive the same features and benefits as the landlord/seller or the tenant/buyer, depending on which role you take in the transaction.

Realtor Benefits

As a realtor, you would be wise to add the Lease Purchase contract to your toolbox of income producing techniques. Imagine opening your doors to a world of buyers and sellers that nobody else in your office has even considered. In fact, every buyer and seller you meet is a potential Lease Purchase candidate. This can provide a special market niche for you. And having a special niche is what separates the top producers from the mediocre ones.

Never lose another deal because your seller is overpriced or because your buyer can't get financing. A Lease Purchase requires half the work of selling a home the conventional way so you will be much more productive (and wealthy). Furthermore, some of the most successful professionals in the world, including insurance agents, movie stars, musicians and authors benefit from a little-known financial secret about the best kind of income you can earn; residual income. 

What do they know that you don't? Simply put, they know that residual income provides for a steady cash flow that is paid at a date after your work has been completed. Imagine the income you'll receive from lining up one or two quick and easy deals every month for the next twelve months.

Or instead of waiting one or two years for the options to mature, you could:

 

  • Consult with people on an hourly basis?
  • Pay a referral fee to someone for lining up these opportunities for you?
  • Charge an up front fee for your services instead of waiting for the residual income?
The possibilities are endless.

More important, you are in a position to make the Lease Purchase option known to a select group of potential clients who would not qualify in any other way to purchase. They will remember the opportunity you gave them. At minimum, you have a fiduciary responsibility to determine whether a Lease Purchase agreement could help them solve their real estate problems. It may be exactly what they need.

 

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  11. What is the Due-On-Sale clause?

It is a clause in a mortgage agreement providing that, if the mortgagor (the borrower) sells, transfers, or, in some instances, encumbers the property, the mortgagee (the lender) has the right to demand the outstanding balance in full. It is a contractual right, not a law.

Banks began inserting Due-On-Sale clauses in their mortgages in the '70s when interest rates rose dramatically. Home buyers were assuming existing loans rather than borrowing new money from banks because the interest rates on existing loans were lower. The banks used the Due-On-Sale as a way to kill their own worst competition.

The homeowners fought the banks in court claiming that the enforcement of the Due-On-Sale was "unfair trade practice." The consumers won, but the banks lobbied Congress to pass a federal law which would supercede the courts. The banks ultimately won and the "Garn-St. Germain Federal Depositary Institutions Act" was passed.

The Garn law gives the banks the right to enforce the due-on-sale, but it also carves a few exceptions in which the lender may not enforce it. One of those exceptions is that a homeowner may transfer title to a living trust for his own benefit.

The Due-On-Sale clause is a non-issue. Here's why...

There isn't a single lender on the face of the earth that is going to enforce their Due-On-Sale rights on a mortgage that is performing (being paid on time). Why? Because lenders are in business to make money. If they enforce their DOS clause, they are essentially taking back possession of a property in order to sell it, more than likely for a huge loss.

Furthermore, lenders will only enforce their DOS clause for one reason, the payments are late. And guess what? If the payments are late, the bank is going to foreclose, not enforce their DOS clause.

And remember, there is no Due-On-Sale jail.

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  12. The difference between a Lease Purchase and a Lease Option?

In general there is absolutely no difference between a Lease Purchase and a Lease Option. 

When an experienced real estate professional talks about a Lease Purchase or a Lease Option agreement, they are usually talking about an arrangement that contains both a lease contract and an option to purchase contract. By definition, this is really a Lease Purchase (or Lease Option, depending on your perspective). Thus...

Lease + Option to Purchase = Lease Option AND Lease Purchase

The only time they are different is when the Lease Purchase Agreement has a clause that states that the tenant buyer is obligated to purchase the property during the lease period or at the end of the lease. 

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  13. How much money do I need to start my Lease Purchase business?

Technically, one dollar will get you started. Most experienced Lease Purchase investors make a healthy upfront profit on every deal they do, therefore, you probably won't need any money to get started. However, if you're a beginner and you don't have any collateral for the option deposit, it would be to your benefit to have $500 - $2,000 in the bank. This money can be used for your option deposit, to cover late payments from your tenant/buyer or unexpected maintenance.

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  14. How much should I charge for rent each month?

You can charge whatever you like. I suggest determining what similar properties in your neighborhood rent for, then I would add a little (maybe $50 - $300) to your figure. Since you are offering the best financing terms anywhere, you have the right to demand a premium rental payment for your property.

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  15. How much should I charge for the option deposit?

You can charge whatever you like. I try to get as much as I can to ensure that my tenant/buyers are actually going to follow through and buy my house. A typical tenant/buyer will not walk away from anything more than $3,000 to $5,000, and if they do walk away, you simply keep their option deposit and find someone else who has a large option deposit.

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  16. How much should I give for the monthly rent credit?

You can give whatever amount you like. I tend to give 25% to 50% of the monthly rent. However, I live in San Diego, California where the cost of an entry level single family home is at least $350,000 and therefore it is quite easy to increase the purchase price of the home to cover the higher rent credit.

Let's do a quick example of how monthly rent credit works...

If you have a tenant/buyer who has contracted with you to Lease Purchase your home for 12 months, you could give them a $500 per month rent credit. At the end of the 12 month period (the option period), they will have a $6,000 credit which they can use to either (1) reduce their closing costs or (2) reduce the sales price.

If you would like to raise your rent credit to make your property a little more marketable, simply raise your sales price accordingly. For example, if you would like to give a $800 per month rent credit, simply raise your sales price by $9,600 ($800 increase x 12 months = $9,600).

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  17. How do I protect my option if I am the tenant/buyer?

There are several ways to protect your option. First, you can record it in the public real estate records (usually done at the county courthouse). Second, you can create an escrow up front in which a title company or attorney holds the executed deed. Third, you can record a mortgage to secure the performance of the option agreement. (Called a Performance Trust Deed in California) A good Lease Purchase course will explain these in greater detail.

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  18. What is the best way to advertise a Lease Purchase home?

Let me share with you my simple recipe for successful Lease Purchase marketing. Mix three parts local classified advertising with one part signs in the yard, one part flyers at local retail outlets and one part postcards to real estate professionals and you've got a winner. With any luck, you'll have your home sold within two weeks! 

In San Diego there is a "Rent to Own" heading in the Classified section of the San Diego Union newspaper. 90% of the time, if I place an ad in the Rent to Own section of the Sunday classifieds, by the following Wednesday I will have a signed lease purchase agreement with a qualified tenant buyer.

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  19. Why aren't realtors receptive to the Lease Purchase contract?

Realtors who are uneducated on the subject believe they won't receive a commission if they list a home for sale by Lease Purchase. The truth is, they will indeed receive a commission, but it will be delayed until the deal actually closes 6-24 months down the road.

Otherwise, most realtors are starting to catch on. Some states even offer Lease Purchasing as a course for continuing education credits.

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  20. Where can I get a credit report for my tenant/buyer?

Getting a Credit Report is extremely important. Order the Credit Report that lists if the tenant has ever been evicted. If the credit report shows the potential tenant buyer has IRS tax liens, I pass with that prospect. The best place to get a credit report for your tenant/buyer is through a local loan officer. Tell this individual that you're an investor and that you'll be sending them business. They will be delighted to help you and probably offer to give you credit reports for free.

Alternatively, you can do a search on the internet for "credit report service." You'll probably come up with a half-dozen companies that charge between $15-$30 for this service.

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  21. Should I incorporate my Lease Purchase business?

Incorporating will provide you with some solid protection for your personal assets in the event you are sued. If you're just starting out, I recommend holding off on this until you get a deal or two under your belt. Once you've decided that you like the business and you're going to continue on with it, then consider incorporating.

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  22. Who carries the insurance on a Lease Purchase home?

The insurance on the home is carried by the owner of the home (you cannot insure something you don't own, this is called "insurable interest").

The insurance on the contents of the home will be carried by whomever owns the personal property inside, usually the tenant/buyer. This is typically called renter's insurance.

If you are the middle-man in the deal (you're the landlord/seller, then you sub-Lease Purchase to a tenant/buyer), you might want to get yourself a general business liability policy to protect yourself from any liability claims. For additional liability protection information (click here)

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  23. Who pays the taxes on a Lease Purchase home?

The person whose name is on the deed pays the taxes.

 

Gar C. May, Real Estate Broker
cadre#479003
1357 Hornblend Street
San Diego, Ca 92109
gmay@san.rr.com
858-272-5510
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