Lease to Own in Malibu? Here Some Tips

by ritasimpson on December 21, 2011

in Buying My Home, How's The Market, Selling My Home

Are there any lease options available in Malibu?

About 27 opportunities today and an increasing possibility in the Malibu Real Estate Market.

A Lease Option could solve both Seller and Buyers issues at this critical time.

Here is a good explanation of the  Lease-Option process given by a professor at Wharton  School at  the University of Pennsylvania.

Some examples of the Lease Option opportunities are shown after the article.

A lease-to-own house purchase(also “rent-to-own purchase” or “lease purchase”) is a lease combined with an option to purchase the property within a specified period, usually three years or less, at an agreed-upon price. Such arrangements have proliferated in the post-crisis market because many potential home buyers can’t meet the tougher loan qualification requirements today, and many potential sellers are unable to realize a satisfactory price in any other way.

Lease-purchase plans can be structured in such a way that both parties benefit. They also can be structured so that all the benefits flow to one of the parties and none to the other. Buyers especially need to be careful because they usually know less about the market than sellers, and the seller usually provides the contract.

Contract features of a lease-purchase

In a typical arrangement, the borrower pays an option fee, 1 percent to 5 percent of the price, which is credited to the purchase price. The borrower pays a market rent, and an additional rent premium that is also credited to the purchase price. The option fee, option period, rent, rent premium, and purchase price are all negotiable items. If the purchase option is not exercised, the buyer loses both the option fee and the rent premium.

Buyers generally prefer a long option period because it provides more time to accumulate savings and repair credit. A long period can boomerang on them, however, if they are never able to exercise the option, because they lose the rent premium they have been paying all the while, in addition to the option fee. Sellers generally prefer a short option period — but if it is too short, the house won’t be sold.

The option fee and rent premium are viewed differently by buyers and sellers. To the buyer, they are part of the equity in the house they fully expect to own. To sellers, however, these payments are the best guarantee that their houses will sell; if they don’t sell, the payments are retained as income. That the benefit to the seller generally exceeds the cost to the buyer makes the lease-to-own deal a possible win-win.

A lease-purchase contract may or may not give the renter/buyer the right to sell the option. This will have value to the buyer who isn’t completely confident of being able to exercise the option. It is a cost to the seller who prefers to retain the house and the monies collected.

Lease contracts may also contain provisions that nullify the buyer’s option, a point discussed below.

Using a lease-purchase to buy

The lease-purchase offers homeownership opportunities to consumers who can’t qualify for a loan from any source, but who are prepared to bet on themselves. The bet is that before the option period expires, they will qualify for the mortgage they need to exercise the purchase option. During the option period, they have the opportunity to rebuild their credit and accumulate savings while living in the house.

Even though it is costly, the right not to exercise the option is of value to buyers. If there is something seriously wrong with the house, neighborhood or neighbors, the buyer can cut their losses by not exercising the option.

Dangers to buyers

A major threat to buyers is contractual provisions that can nullify their option, such as the failure to pay the rent on the first day of the month. Such provisions are most likely to appear in contracts used by developers or firms that own multiple homes. Read the contract very carefully to make sure you are confident you can meet all the conditions.

Using a lease-purchase to sell

Most home sellers want a cash sale, but for those prepared to hang on to the property awhile longer, the benefits can be compelling. Buyers unable to become homeowners in any other way generally will be willing to commit to a future price substantially higher than the same property could be sold for today.

While the deal may fall through, in that case the seller gets to pocket the option fee and rent premium. The seller also continues to enjoy the tax deduction on their mortgage interest payments during the option period.

Not part of the down payment

The option fee and rent premium are not part of the down payment unless the seller agrees to relinquish the right to retain these payments in the event the buyer doesn’t exercise the option. Few sellers would be willing to do that. But the option fee and rent payments do make the required down payment slightly smaller.

For example, the parties agree to a price of $100,000 and the option fee and rent premium add to $5,000 when the option is exercised. From the standpoint of the lender, the price is $95,000 and a 5 percent down payment requirement would call for a down payment of $4,750 instead of $5,000.

Jack Guttentag is professor of finance emeritus at the Wharton School of the University of Pennsylvania.

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