Recently a Mortgage Porter reader, Lisa, sent a question via my Suggestion Box (located on the right side of this web site):
"Rhonda, Can you address lease options and lease purchases? Have you seen these going on around King County? Thanks!"
Leases are not a part of what I do as a Mortgage Originator…so I enlisted a local real estate professional, Diane Kawell of Windermere West Campus. The article below is actually reposted (with permission) from her blog, Di Kawell Real Estate Blog.
The easiest way to keep these straight is to remember that a 'lease purchase' is a purchase agreement – remember the word 'purchase.' In this strategy, the buyer agrees to buy and the seller agrees to sell, and the buyer will lease the property from the seller pending closing. There is often a delayed closing, but the buyer is obligated to close the transaction on a specified closing date. There would be a written purchase and sale agreement plus a lease agreement, and default on the lease would be default on the purchase and sale as well.
A 'lease option' is a situation where a tenant is obligated only to lease the property, but also has the right, or option, to purchase the property at a future date. There would be a written lease, as well as a written option agreement that should outline the terms of what the buyer's purchase would include, and a deadline for the buyer to decide to purchase or not. There would also be a negotiated cost between the parties for the option itself, which could be handled in several different ways (part of each rent payment, an upfront lump sum, etc). And the option cost may not be refundable if the tenant chooses not to exercise the option.
Also, there is another strategy which is simply an 'option to buy.' And this option is unrelated to any lease between the parties. Again, there would be a written option agreement outlining all basic details. And most often there would be some sort of cost for the option itself.
***All of this said, none of what I've written above, or will say below, is to be relied upon or construed as legal advice. I am a licensed real estate associate broker, not an attorney. I am licensed to fill in standardized forms, but not to give legal advice.*** Also, at this time in Washington state, there are big legal issues if a property owner is in a distressed situation and a buyer wants to offer to buy and lease back to them with a purchase option – you don't, and I don't, want to go there.
Three issues to consider:
- In a declining market, a sale price set today, may not be market value by the time a sale would close, and that could mean financing problems due to any required appraisal.
- Although a buyer might qualify based on today's rates and programs, they may not qualify when it comes time to close – we know the current volatility in the financial markets!
- The parties will have to decide whether or not is acceptable or desireable to keep the property on the market during the pending, lease or option period – there is no law addressing this issue. In my opinion as an agent, successful transactions are always about win-win between the parties, so with the right set of circumstances, using these options might just be the best answer. Another example: Seller is working out of area for the next couple years, might or might not want to sell, and buyer needs time to get their lives or finances straightened up.
Still Have Questions? Please contact me.
To try to find out if Lease Options or Lease Purchases are becoming more common in King County, I've posted the question at Trulia. You can check out the answers by clicking here.