The problem with the agreement is that a buyer may be asked to sign a contract which has been written to highly favor the owner. The Texas Real Estate Commission does not have standard forms for a lease purchase agreement. This means that an attorney or the owner themselves write the contract. The contract is a unilateral or one-way contract. The buyer has the right to buy but not an obligation to buy. The seller is obligated to sell the property to the buyer.
Definition of a lease purchase agreement
An agreement in which part of the rent payment is applied toward a set purchase price. Title is transferred from lessor to lessee when the lessor receives the prearranged total price.
Scenarios of what can go wrong with a lease purchase
The monthly payment amount is dependent upon the buyer’s credit. Houston Realtor Bill Edge worked with a client who had signed an agreement which allowed the seller to raise the rent by $500 a month if their credit score dropped below 600. The tenants had given the owner a $20,000 down payment. This was all the money they had in the world. The buyers could not make the higher rent payment and were forced to vacate the property.
The Buyer cannot find financing at the end of the contract. This is a very common problem. Most buyers sign a lease purchase agreement because their credit will not allow them to obtain a mortgage loan. If at the end of the contract the buyer still cannot obtain a loan they could lose their deposit and be removed from the home. The owner would be free to sell the home to someone else, extend the contract, or sign a new agreement with the buyer.
The price of the home could drop in value. The buyer/tenant has signed to buy the home at a certain price. The market has dropped and the home is now only worth 60% of its value. The owner will not change the agreement; the buyer does not want to pay this amount. The buyer then loses their deposit and is forced to move or sign a new contract.
Definition of a lease option
A lease clause that gives the tenant the right to purchase the property under specified conditions. Following are some important features of a lease option.
- It usually runs with the land, so that if the lease is assigned, the option to purchase is likewise assigned.
- Usually it does not extend beyond the term of the lease.
- The supporting consideration can be the rent being paid. A default in rent may result in termination of the option.
- It can be assigned separately from other provisions in the lease.
The lessor/optionor must be careful to structure the transaction so that the economic reality of the transaction will make it a lease rather than an outright sale. For example: If the total payments under the lease are substantially equal to the purchase price payment under the option, and if the payments are applicable to the purchase ice, the IRS may characterize the deal as a sate because the lessee has no other economic choice but to exercise the option.
An option in a lease is inseparable from the integrated tease contract, and therefore an extension of the lease usually prolongs the life of the option, unless the lease states otherwise.
In addition to an option to purchase, other lease options include options to renew and options to extend. Under the latter, the original lease is continued on the same terms, including the extension provision. With an option to renew, the lessee is entitled to a new lease on set terms, not including the original renewal provision.
Before signing a lease purchase agreement contact an attorney to review those documents so that you know your true position. It is absolutely imperative that the buyer/tenant be represented by a Realtor and advised by an attorney. A simple statement added to the contract such as “the contract is null and void if the buyer cannot find financing” could save you money.
Call Bill Edge at 713-240-2949 to see Houston homes in 24 hours or less
Source: The Language of Real Estate