Lease Option/Rent to Own. How to??? (tenant, disclosure, recommendation)

[TheLongestJourney...]

Not sure if this is the right forum, but I am looking for information on how to negotiate a lease with option to purchase.

I have come across several companies that offer this service, but the ones I have come across seem like bad deals. Basically they will purchase the home for you and give you 1 - 2 years to purchase, but the problem is the amount they add to the purchase price seems high to me. One company was adding 10% to the purchase price so that if the home was $200,000 when you entered the agreement, the price would be $220,000 when you were ready to buy regardless of whether you were ready in 6 months or two years.

Does any one have any recommendations on approaching home sellers? Any suggestions on making this a win/win situation for both parties? Would a buyers agent negotiate this type of deal? What is reasonable to add to the purchase price and what is the best way to determine the final sale amount?

I have no problem with the option money, just don't want to get ripped off by the final purchase price, especially considering the current market. I am looking at the Tacoma, WA area and rental prices have gone up considerably in the last year making a lease/option more attractive to me even if I don't exercise my option to buy at the end of the lease.

[MikeJaquish]

Many, many Lease/Option operators are in the business solely to get your deposit money. Then, they don't really care if the sale closes, as they can offer a L/O to another pigeon.
As you pay rent, they can offer to apply any amount of that rent to the principal.

Will a Buyer's Agent help negotiate it? Some will.
Will an attorney touch it? Many will not, due to the high level of scamming involved.

The amount they add to the purchase price is in anticipation that the property will appreciate. Check your local conditions before you make that assumption.

Here's the text of a blog I did earlier this year on another site on Lease Option Heartache:

Avoid Lease Option Heartache

So, you have some income, but you messed up your credit a few years back and with a couple of repossessions and a foreclosure, you think you'll never own a home again. How could it get worse?
Well, one way to make it worse is to fall into a predatory "Lease/Option" scheme with an unlicensed Seller.

You've seen the signs advertising, "No Bank Needed! No credit check! $2500 + $1100/month Lease Option. FSBO. No Realtors, Principals only."
It is one of the hottest marketing areas in real estate.
Lease Option can be done "right," offering homebuyers an alternative path to homeownership.
It can be done "wrong," creating added heartache for the eager and unsuspecting buyer.
http://www.wcnc.com/news/topstories/stories/wcnc-112806-al-home_solutions.345e71fd.html

How would you recognize a predatory Seller?
If the Seller discourages you from doing anything in the following list, consider running away really FAST:
•1. First and foremost: Hire a good real estate attorney to write the contract and/or review any documents, and tell you what they mean, and how you may be affected. Ask if he/she should or will hold in trust your deposit and any of your monthly payment that is earmarked for your down payment.
•2. Pay a licensed home inspector to do a full report on the home.
•3. Pay for a termite inspection.
•4. Have your insurance company check the home for insurability.
•5. Check that proper permits have been pulled and city/county inspections performed.
•6. Have the home appraised by a licensed appraiser. Valuations from fluff websites like Zillow, or the tax value are NOT acceptable substitutes.
•7. All of the above should be done by professionals YOU select, not the Seller's attorney, inspector, or appraiser.

See, with all the "Flip thisorthat House" scandal entertainment on TV, a lot of amateurs, and worse people, have jumped into the business of real estate "investing."
Often dilapidated homes are poorly rehabbed with unskilled cheap labor, no permits, and minimal disclosure regarding systems and conditions. You may be told, "You don't need an inspection. We have been over this place from one end to the other."
GET IT INSPECTED!

You can find L/O Sellers in online forums crowing about how they don't care if the L/O Buyer ever gets financing, because after the lease period, they may get to keep the "deposit" and the "extra" monthly payment. And often they are in agreement that if they do close the transaction, it is all right, because the house is overpriced anyway!
And for that year or two, they basically have a tenant who cares for the property with pride of ownership. This is not set up as a win-win. But as a No-lose proposition for the predatory "Investor."
And what if things go well, you apply for a mortgage and the house, which is probably well overpriced, doesn't appraise after the 12, 18, or 24 month lease period? Where is your deposit and "extra" money? Your attorney who writes the contract can help you answer that question.

Avoid Lease/Option Heartache! Sometimes it is better to rent!

More on Lease/Options:
http://www.google.com/search?num=20&hl=en&lr=&safe=off&rls=com.microsoft %3Aen-us&q=predatory+lease+option+&btnG=Search

North Carolina bill regarding home resale dealers:
http://www.ncleg.net/Sessions/2005/Bills/House/HTML/H725v2.html

[Bill Keegan]

Originally Posted by TheLongestJourney...

Not sure if this is the right forum, but I am looking for information on how to negotiate a lease with option to purchase.

I have come across several companies that offer this service, but the ones I have come across seem like bad deals. Basically they will purchase the home for you and give you 1 - 2 years to purchase, but the problem is the amount they add to the purchase price seems high to me. One company was adding 10% to the purchase price so that if the home was $200,000 when you entered the agreement, the price would be $220,000 when you were ready to buy regardless of whether you were ready in 6 months or two years.

Does any one have any recommendations on approaching home sellers? Any suggestions on making this a win/win situation for both parties? Would a buyers agent negotiate this type of deal? What is reasonable to add to the purchase price and what is the best way to deterermine the final sale amount?

I have no problem with the option money, just don't want to get ripped off by the final purchase price, especially considering the current market. I am looking at the Tacoma, WA area and rental prices have gone up considerably in the last year making a lease/option more attractive to me even if I don't exercise my option to buy at the end of the lease.

Rent or lease with an option to buy can be an interesting contract. I'll admit up front that while I've looked at them, and presented a couple, I have not actually closed one, so take my thoughts as something less than gospel.
First, you need to find a property where lease with option is a possibility. Many landlords don't want to sell the property. THey have it for the rental income it generates. And many sellers don't want to rent, because they want their money out now for something else. Once you locate a property, I would think the terms of the offer are dependant on the primary type of seller you have. I mean, is it a seller that you'll be asking to basically take small payments for some period of time instead of getting all his money now? You'll have to give him some inducement to do that. If the market is sluggish, and his house might just sit without being sold anyway, perhapos the inducement can be less. You also have to recognize that he's taking the risk that you might never want to buy at all. If the property you want is curently being offered as a rental, and you are going to try to convince the landlord to sell it to you, he's going to want to be sure he can either make a nice bit of cash now, or be protected in case the value goes up befor you buy.
Will you be looking for a guaranteed sale price now? Or will you agree to purchase at fair market, with a percentage of your rent being applied to the price? The deal you mentioned above, with 10% being added to arrive at the final sale price, even if it's in 2 years, doesn't strike me, at first glance, as a bad deal. Is the monthly lease paymnent in line with other simlar properties? What portion of it will go toward the purchase? If the market value of the property falls below the $220k, you simply walk away, having paidfd rent to live there for 2 years, but if the value goes up, is it possible that you get a $250k property for $220k, with some portion of 2 years rent coming off that sale price?
So many questions. Sorry if I confused things instead of making them clearer, but you need to get all this info.

[TheLongestJourney...]

Mike: Thanks for all the information and links. A lot of what you posted makes sense and addresses many of the concerns I have.

Bill: Thank you for your perspective. You didn't confuse things at all :-). I appreciate all thoughts on the subject since I have no experience in this area and have rented my whole life.

[palmcoasting]

Yes, a real estate agent should be able to assist you. I've done a couple of them but again, as Bill said, none of them actually 'closed'. When it came time to close the buyer was still unable to get financing. As an owner you run that risk. As a buyer you run the risk of paying too much or loosing your escrow deposit. But...that doesn't mean it can't work as intended. If I were willing to go in to such a contract I would be staying away from the investors/businesses that do it for a living and go with a private homeowner that is listed on the open market but that is just me for my own comfort level.
In this day and age it would be prudent to make sure there is something in the contract covering what would happen in case of a foreclosure. It's not specifically addressed in most pre-written state contracts and since foreclosures are happening more and more it would be prudent to address it in the contract. I would also suggest the owner of the property or yourself carry a home warranty for issues that may come up while you are living there. Some of the deals will carry a clause that you will be responsible for any and all repairs even though you are renting before closing. Also make sure that you have the owner sign off on any improvements you may do to the property while you are living there.

[TheLongestJourney...]

Originally Posted by palmcoasting

Yes, a real estate agent should be able to assist you. I've done a couple of them but again, as Bill said, none of them actually 'closed'. When it came time to close the buyer was still unable to get financing. As an owner you run that risk. As a buyer you run the risk of paying too much or loosing your escrow deposit. But...that doesn't mean it can't work as intended. If I were willing to go in to such a contract I would be staying away from the investors/businesses that do it for a living and go with a private homeowner that is listed on the open market but that is just me for my own comfort level.
In this day and age it would be prudent to make sure there is something in the contract covering what would happen in case of a foreclosure. It's not specifically addressed in most pre-written state contracts and since foreclosures are happening more and more it would be prudent to address it in the contract. I would also suggest the owner of the property or yourself carry a home warranty for issues that may come up while you are living there. Some of the deals will carry a clause that you will be responsible for any and all repairs even though you are renting before closing. Also make sure that you have the owner sign off on any improvements you may do to the property while you are living there.

Thanks - good point about addressing a foreclosure in the contract. At the risk of sounding morbid, another thing that crossed my mind is what if the owner should pass away before closing.

I also think dealing directly with the home owner would be the best way to go. It is good to know that an agent would/could assist. I have the down payment and a good credit score, just need to establish work history in the area so I could qualify for My Community or some other loan with good terms.