Elliott Homes discovers that time might be the only thing some home buyers need to purchase a home; their new lease-to-buy program proves successful in a rough market. Are lease to purchase programs the silver bullet in a market plagued by an oversupply of new and resale housing opportunities?
A lease-to-purchase home agreement (also known as rent to own, lease to own and lease option agreements) is just as it sounds, it is a deal between a buyer and a seller that permits the buyer to move into a home now, and finalize the purchase later. Lease-to-buy programs give buyers more options and provide buyers with time to build their credit report, save money for a down payment, and better prepare for homeownership.
FAQs about a lease-to-purchase home agreement begin in the middle of the page
In December of 2008, Elliott Homes in Arizona introduced a rent to own program giving home buyers the opportunity to participate in a 12-Month Lease Purchase program. The program helps buyers who cannot qualify to purchase a home today, but could qualify within the next 12-months. Potential buyers must prequalify with Elliott Homes’ preferred lender.
As part of the program, Elliott Homes helps the buyer save up to 3.5% of the down payment over 12-months. Home buyers who perform as expected during the 12-month period can use this money as part of their down payment, in addition, they can use their returned security deposit to offset closing costs. The up to 3.5% in savings, and returned security deposit, allow a buyer to incur fewer out-of-pocket expenses when finalizing on their new home.
Elliott Homes offers this program on inventory homes in four Arizona communities; as of today, four buyer/tenants are already living in their new home and five more will move-in before April.
Information about the Elliott Homes’ Lease Purchase program can be found at www.elliotthomes.com. For prequalification, contact Jim Ross of IMortgage at (480) 627-0100.
Update: T.W. Lewis, an Arizona luxury home builder, also offers a Lease Purchase Program on inventory homes in gated T.W. Lewis communities throughout the valley. The program offers up to two-years of leasing and payments between $2,200 and $3,5000 per month; 25% of your monthly rent is used to purchase the home. Learn more about the T.W. Lewis rent to own program at www.TWLewis.com
Frequently Asked Questions About A Lease Purchase
Q: Who is responsible for the home’s maintenance, upkeep, and taxes and insurance?
A: Typically, the home buyer is responsible for these expenses during a lease purchase.
Q: Can the seller sell the property to another buyer during the agreement terms?
A: No, if a buyer and seller enter into a lease-to-buy contract, the seller cannot sell the home unless the buyer defaults.
Q: As a buyer, do I have to purchase the property when the lease term ends?
A: Yes, the agreement requires the buyer to purchase the home when the lease term ends.
Q: How is the purchase price of the home determined?
A: The buyer and seller, just like a traditional purchase, agree upon the home’s purchase price. The value of the home is most commonly market driven.
Q: What is Option Money?
A: Option money is money paid by the buyer, to the seller, for the right to buy the home later. Option money is not usually refundable.
Q: Can the buyer sell their right to the home?
A: Yes, in most cases, the option money gives the buyer the right to sell their option if they choose not to purchase the home.
Q: How much does the buyer pay during the lease?
A: The buyer and seller agree on the monthly payments.
Q: Are monthly payments on a lease purchase more expensive than monthly payments on a traditional rental property?
A: In most cases, the monthly payments for a lease purchase will be larger than rental payments on a similar home; however, the extra money is used to decrease the home’s eventual purchase price.
Q: Does the buyer have to qualify for the home loan before the agreement comes to term?
A: No, the home buyer does not have to qualify for the home financing until the contract term expires, however, pre-qualification may be necessary to ensure that the buyer will qualify for the home loan at a future date.
Q: If a buyer defaults during the agreement, is any of the “extra” money collected during the agreement period refundable?
A: No, if a buyer defaults, they usually lose their right to the property, the option money and all “extra” money that was going to be used to lower the purchase price.
Q: How long do lease option agreements last?
A: The buyer and seller agree on the length of the rent to own agreement; typically, they last between one and three years.
Before agreeing to lease purchase a home, be sure to have the home appraised and inspected by a home inspector, in the case of a new home, ask about available home warranties.
Are there any home builders in your area with a lease-to-purchase program?
Subscribe to our New Homes Blog!
2 questions- has this become common for home builders in Arizona? and 2, if you are willing to discount your inventory to a buyer today, why wouldn’t you just move towards market rent, and allow some portion to go towards purchase if they qualify a year down the line in lieu of full discount.
Seems to me you’d get many more renters, and remove and “option” contract and move people in.
Terry, thanks for stopping by.
1. It doesn’t look like a lot of Arizona builders are offering lease to purchase programs, but it may become more common as homes sit on the market. These programs are probably more beneficial for the builders that don’t take out construction loans to build their homes.
2. I would imagine that the home’s price is still discounted in a lease purchase agreement. In most markets, unless the buyer puts down a large down payment, I think rental properties are still cheaper (because of the competition). In addition, I doubt lenders will prequalify buyers for monthly payments that are less than what they will be when they purchase the home.
I do think that lease purchase options could be a viable option for some builders that are trying to find buyers. It’s a slippery slope though as a percentage of the buyers will default – I’m sure most builders would like to stay away from becoming management companies.
Another feature that can be added to that plan is to add an “down payment assistance program.” Basically, for every dollar the buyer puts down in addition to the regular lease, you match a certain percent with them. This will increase their down payment in the future. This also increases your cash flow now. Sometimes that how you can make the deal work… or make it even more profitable.
Lease Purchase Homess last blog post..Financing Real Estate with Money Partners
Lease Purchase Homes,
Thanks for stopping by – don’t forget to come back
I like that idea a lot, do you know if there are any legalities that would prevent a program like that? The buyer could get landscaping (anything), or choose to set up a savings situation that is shared by them, and the builder. It even helps encourage savings, which is what many of us need to do more.
Maybe Elliott Homes will stop by, read your recommendation, and use it.
In my experience there are not any legal reason not to do that.
All you’re basically doing is asking them to pay more NOW, and you’ll let them pay less LATER.
For example:
A person is going to lease a home from you for $1,000/mo with the option to buy it in the future for $100,000. You receive an option fee of $3,000. Let’s also say you purchased the property for $60k and in 2 years (when the option expires) it will be worth $100,000 (flat market).
So, given those details, your profit would be the lease payments (minus expense) as well as the difference between purchase price and sale price when the buyer cashes you out, as well as the option fee. So let’s say you’re flat on the lease payments and your profit on the sale is $40,000 plus the option fee equals $43,000.
If your $1,000 per month from the future home buyer is covering your expenses and not much more, you may decide that you offer this person a “down payment assistance program.” What will happen in this case is, if they can give you $1,200 per month, you’ll give them $300 credit towards the down payment and if they gave you $1,300 per month, you’d give them $500 towards the down payment.
So in the case of the $500 towards the down payment, that would be $12,000 over 24 months.
So in the end, your profit would now be $300/mo @ 24 months = $7,200 plus $28,000 profit on the sale ($40,000 – $12,000), plus the option fee. This would give you a grand total of $38,200.
It’s technically “less profitable” but it all depends on what that $300/mo in extra cash flow got you.
The real point is that you have many options and you have to figure out what works best for your buyers, sellers and you.
Lease Purchase Homess last blog post..Financing Real Estate with Money Partners
Thanks for the many examples and the clarification. – Agreed, extra options are better.
Does anyone know if the buyer in a lease purchase agreement gets the tax benefits of buying a home, or under the tax code, is lease to purchase looked at as renting?
Thanks for your help.
Ellen,
Thanks for stopping by.
I don’t think the buyer, in a lease purchase agreement, would get the $8,000 tax credit unless they purchased and closed on the home before December 1, 2009 (that date could always change). If the home is purchased before then, it’s just like any other purchase.
Until the home is purchased and the home loan is closed, it’s likely thought of as renting since it’s basically only an agreement between two parties to do something in the future. You might want to try an 8-month lease to buy if possible.
Thanks for answering my question. Also, is any part of a lease purchase considered as a morgage interest payment, i.e. tax deductible?
Ellen-
The tenant buyer gets no tax benefits
The investor (party in the middle) gets no tax benefits. The investor only gets tax benefits if and when they cash the original owner out and retain the tenant buyer.
The owner of record (who is also paying the mortgage and taxes) retains all the tax benefits until the property is sold to someone else (investor or tenant/buyer).
Lastly, in a sandwich deal I try to structure it so that I am responsible for the first $200 of any repair and the tenant is responsible for the first $200 of any repair…so technically they both get a benefit that doesn’t cost me anything.
Lease Purchase Homess last blog post..Financing Real Estate with Money Partners
Great analysis – Lease Purchase Homes…
While I’m no expert on ‘Lease to Own’ housing, I do agree with you in that there are no tax benefits for leasing a home.
Phoenix CPAs last blog post..How to Cope with Stock Market Volatility
Responding to the question about the value in the Lease Purchase program for builders. – As a representative for Elliott Homes in Arizona I can tell you that most builders are not able to handle this type of act due to bank involvement. Most builders either have a loan out on the land development or construction of the home that forces any program like this to be reviewed by the bank with an interest in that home/lot. Since there is a higher level of risk to a “lease” versus a home that sits with no buyer, the bank/builders are not interested in allowing that type of program.
Elliott Homes is one of few cash builders in the valley. We pay cash for the land, pay cash to develop the lots, and pay cash to construct. Therefore the homes we have are owned “free and clear” of any other lien holders.
We started the 12-Month Lease Purchase program for our inventory homes in January of 2009 and to date have a total of 27 “tenants” working towards home ownership. We have already closed 2 deals before the end of their individual 12 month timeframe. We anticipate another six will close before the end of the deadline for the government tax credit (November 30th) and two more before the end of the year. Overall it has been very successful.
On the flip side, we have had to deal with some poor “buyers” to include one eviction. We started this program hoping for a 75%+ success rate and the ability to offset multiple monthly expenses (HOA and utility bills). We are doing much better than originally expected and due to a rapid increase in sales over the past few months we have cut back on the availability of this program.
As of today 8/19/2009, the program is only available on select homes in Buckeye. If you have any questions, please feel free to contact our offices in Tempe, AZ.
Derek Anglin
Elliott Homes, Designated Broker
And the number for the office in Tempe, AZ is
480-831-9200
Michael Pennock
Elliott Homes
Sales Administrator
i am trying to sell my manufactured home on 1 acre and am having no luck. i have an invester interested on doing a lease to purchase. we want to move badly and are considering it. i have my concerns though, like what if he backs out of the deal, am i still responsible for the house? i cannot afford two mortgages. if there is repairs that need to be done am i resposible? im really not to educated on this matter and its pretty scary. i was told by an agent that if he backs out of the deal, to just let the house go and it only takes 80 points of your credit score. just doesnt seem right to me. help. thanks
I think a lease purchase can be a very good idea in these economic times. Im not sure about speculating value on brand new homes but if it is a way in for potential buyers that may not have another way then ok.
Mike Jones´s last undefined ..If you register your site for free at