First, read about seller financing in general. A lease-option or lease-purchase deal is a form of seller financing.
The wrap-around deed of trust deal is a version of seller financing. The advantage of a wrap-around deal is that actual title is transferred to the buyer. With the lease-option deal, title stays in the seller until the buyer refinances or resells or otherwise pays off the seller.
Generally, buyers can get into a wrap-around deed of trust deal if they have a larger down payment. Generally, a seller prefers to sell on a lease-option or lease-purchase basis if the buyer only has a small down payment. A good example of this is the renter who says, oh, by the way, I would like to have the option to buy this house, and who pays only a few thousand dollars in option money. Sellers generally want to see more commitment from a buyer before they part with title.
But a lease-option deal can still be good for a buyer. It may be the only way the buyer can even get close to becoming an owner.
Advice to sellers who sell on lease-option: A renter who pays extra for an option is generally a better renter. You can build into your agreement a clause that says that the renter is responsible for all repairs and maintenance because the renter intends to become the owner down the road. A seller generally wants a shorter option period, say two years, so that the seller can adjust the price upwards if the market rises. A landlord can generally get higher rent from a lease-option buyer than from a regular tenant. The seller generally will want none of the rent to apply to the purchase price.
Advice to buyers who buy on lease-option: Try to get a five-year lease-option. Whatever is wrong with your credit that prevents you from being able to get financing may take more than two years to fix. Also, try to get the seller to sign a deed and deposit into into true escrow so that the deed will be already signed and notarized when the time comes to take title. The lease-option buyer will generally ask that a part of the rent apply towards the purchase price. The lease-option buyer is wise to have rent paid through a collection agent – who might be the true escrow holder of the deed – so that he can prove to the lender who does the refinance that he has paid all lease payments on time.
A seller can generally get a higher sale price when he sells on a lease-option basis. This is because there is a larger pool of potential buyers – those who can get financing plus those who have significant down payments and good income but who have dented credit.
Technically, a lease-option deal triggers a due-on-sale clause. However, because generally the lease-option agreement is not recorded, there is no way the lender can learn of the sale unless one of the parties to the transaction tells the lender.
If your are a buyer or seller who finds a seller or buyer who will do a lease-option deal – without the assistance of a real estate broker – contact me, and I will write up the deal and get it set up for closing. I will also set up the collection account and park a deed in true escrow.
On the other hand, sometimes the best way to find a lease-option buyer or seller is through a real estate broker. A broker wants to be paid his commission, and if the option money is great enough to cover the commission, the commission might be paid at the start of the lease-option agreement. If the option money is small, the broker might have to wait until the buyer cashes the seller out. If the option money is in between, then part of the commission might be payable when the lease-option begins and the rest when the buyer cashes the seller out.
Whether you are working through a real estate broker or not, I am ready and willing to set up lease-option transactions.
I give initial telephone consultations to real estate agents and buyers and sellers by telephone for no charge. I can represent the buyer or the seller. If there is a real estate broker involved, I advise the broker to put together a lease-option agreement on standard forms used by the multiple listing association. Because the standard forms do not cover all issues and because brokers are not licensed to write complex addenda, the broker then brings me into the picture, and I complete the escrow setup.
All mortgages should be assumable – provide the buyer has reasonable credit – however, lenders want to make fees by forcing buyers to get new financing. But buyers and sellers can be creative and “go around” due-on-sale clauses by selling on a lease-option basis.
James Robert Deal Attorney
WSBA # 8103
James at JamesDeal dot com