Creative ways to buy a home after a foreclosure or short-sale

May 18, 2009 at 11:52 am 10 comments

Homeowners who were foreclosed upon or did a short sale of their home are now finding creative ways to get back into home ownership. One way of easing their way into a lifestyle that they are familiar with is called a lease-to-own or lease purchase.

What is a lease-to-own/lease purchase or lease option agreement?
These terms are synonymous with each other and interchangeable. A lease-option agreement allows the renter to lease the home and provides the renter the option to purchase the home in the future at an agreed-upon price.

A typical lease-option agreement requires the renter to pay a somewhat higher monthly rent for the home and obligates the owner to credit a portion of that rent toward the renter’s down payment.  For example, if the owner’s expected market rent was $1,500 per month, he or she might increase that to $1,800 per month and apply $300 per month to your down payment. After one year, you would have a down payment credit of $3,600.

The renter pays an option fee — typically 1% to 5% of the purchase price for the right to the option.  The option fee is typically credited towards the purchase price.  The renter is not obligated to exercise the option to buy the home at the end of the option term.

Why do renters and sellers agree on a lease purchase?

A renter who has poor credit and is unable to secure a loan can consider a long option period (one to three years) to build his credit, while a seller whose house has been difficult to sell might be interested in a lease-to-own arrangement.

Advantages for Renter:

1.  Renter is given one to three years to repair credit and ease into home ownership.
2.  Renter has the opportunity to live in and test the condition of the house prior to buying the home.
3.  Renter builds equity into the home by locking the price now in an upward real estate market.

Advantages for Seller:

1.  Seller is able to find a buyer on a property that is hard to sell.
2.  Seller is able to receive more money for rent than market value. This especially benefits a homeowner who is upside down on his house and does not want to miss payments.
3.  If renter is not able to qualify for a loan at the end of the option term or renter decides not to purchase the property, seller keeps the option fee and premium.

Disadvantages for Seller

1.  Seller is holding the property for a year or more to a renter with less than good credit and who is not certain to buy the property.
2.  Seller may have to take legal action if renter is delinquent in payments or seller no longer would like to sell the property to the buyer.
3.  Seller may lose money in an upward real estate market.

Disadvantages for Renter

1.  Renter has a limited number of homes to choose from because lease-to-own sellers are rare.
2.  Renter loses the option money and the premium if renter decides not to exercise the option to buy the home.
3.  Renter may lose equity on the home in a downward real estate market.

Dangers of a lease purchase agreement:

There are many problems that could take on legal attention in a lease purchase agreement.  Ninety percent of these types of agreements fail because the renter and the seller agree on a price now for a pending contract that will take effect in one to three years. Anything can change within the waiting period in the lives of the renter, seller and the real estate market. These changes could prompt a cancellation of the contract.  Such changes may include:

1.  The real estate market price index can change to favor one party over the other.
2.  A seller may decide to sell the house quicker than the agreed-upon date if the real estate market picks up, if seller is relocating, or if there is a death in the family, unexpected medical expenses, or life changes such as a divorce.
3.  Buyer is unable to continue making timely payments.
4.  Seller may find another buyer who is willing to pay more for the property.
5.  Buyer no longer likes the property due to a job change, growing family, medical expenses, etc.

If the buyer does not purchase the property at the end of the option term, the buyer loses the option fee and premium. If seller no longer wants to sell the home to the buyer, seller may refund the some money to the renter.

Because lease-to-own agreements can be complex legal arrangements, I recommend you contact an attorney to make sure your interests are protected.  For more information, feel free to contact me via email at or phone at (480) 650-0075..

Entry filed under: Arizona Real Estate, Chandler Real Estate, Foreclosures & Short Sales, Phoenix Real Estate, Real Estate Deals. Tags: , , , .

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10 Comments Add your own

  • 1. Daniel | AZ Homes  |  May 18, 2009 at 7:24 pm

    It’s so tough to find a lease option. I know several people looking for lease options that will allow them to buy in todays market price, not future and most owners won’t have anything to do with it. Go figure, because they could be upside down on their house value.

  • 3. Veronica Parzygnat  |  July 15, 2009 at 1:37 pm

    I sold my house in Florida 14 months ago as a short sale. As of 2 weeks ago my credit score is 675 my credit report classified the short sale as a negotiated settlement. I paid my mortgage for 8 years with no late and no missed payments but to qualify for selling as a short sale I had to become delinquent on the last 2 months. I have rented my present residence for the past 14 months with perfect record and will like to become a home owner soon. I need the assistance of a Mortgage Broker with experience in this situation.
    Any Information is appreciated
    Thank you Veronica

    • 4. arizonabargainhomes  |  July 17, 2009 at 12:20 pm

      Congrats on getting your credit score up in a short amount of time! I spoke with a loan officer here in Arizona. He said that your credit score is promising and would like to confirm your qualifications on purchasing a home after getting more details on your financial profile. Unfortunately, he is not licensed in Florida. You may want to check your local lenders to see what they can do for you. I will let you know if I find anyone else who can help you in Florida. Good luck and keep up the good work!


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