In the Arizona Republic today, Countrywide ran a full page ad reassuring customers that it was safe to do business with them. Last Friday, a mortgage broker colleague of mine told me that his brokerage had to stop processing and funding all “no doc” or “stated income” loans. Even locked loans that were in progress were effectively canceled out from underneath him. He noted this policy change killed half of his pipeline, and going forward will seriously affect his business.
The mortgage industry is definitely in a crunch, and many people are going to find it harder and harder to get a loan. With all of that in mind, it was no surprise to me when I received a sign call on my listing at 4658 E Kings from a buyer that was very interested in doing a lease-purchase. This is the kind of deal that I expect to see more and more of in the future…but just what is a lease-purchase?
A lease-purchase or lease/purchase option, is a lease, with the option to purchase the home in the future. Normally, that future date is 1 or 2 years out. The tenant has the option, but not the obligation to purchase the home any time within the option period. Typically, there is a down payment from the tenant, collected a lease inception and kept by the owner, which is applied toward the purchase price. This creates incentive for the tenant to make the purchase. If the tenant chooses not to make the purchase, the owner/landlord gets to keep this down payment.
Also, many lease-purchase deals have a certain amount of money each month that is applied to the purchase. In those cases, the lease rate is typically above market. This is a sort of “rent to own” model, as it builds up the down payment for the buyer over the duration of the lease period. For tenants with a small down payment at lease inception, the landlord would almost certainly seek this type of rent schedule.
The final purchase price is usually agreed to specifically in the deal, although I have seen lease-purchase deals that have an additional “or market value” clause in them. Personally, I like to see a specific purchase price called out for.
While we see this tightening in the mortgage markets, I expect to see more and more lease-purchase deals in the near term, as savvy sellers will continue to become more flexible and creative in finding ways to sell their properties.
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