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Why A Lease Purchase Is Not A Purchase At All

Why A Lease Purchase Is Not A Purchase At All

Lease PurchaseI get a surprising number of phone calls on my Atlanta short sale listings for requests to see if my clients will do a lease purchase on them.  Let's not talk about the short sale or how silly it is that someone would actually lease their home or that someone would actually want to "purchase" a home with an upside down market.  For this discussion, let's focus on homes with equity.  In particular, let's talk about the luxury home market (for our study we'll focus on Chateau Elan homes) and lease purchcases. 

Let's also get the elephant out of the room, a lease purchase is a contract to purchase a property with real money down (called a down payment in traditional purchases).  The money down locks in a purchase option.  There's several ways to do this lease purchase, but usually it keeps the price from escalating and the current owner from selling the home to other parties.  This is what we are talking about.

A lease purchase without down payment or option money is called... RENTING

Now that's out of the way, let's look at some Chateau Elan Real Estate

Our MLS data only goes back to 2007 however in that time, more than 300 homes sold in this one luxury neighborhood.  Chateau Elan features homes from around the $300's (in 2007 the low was $388K, and in 2012 the low as $258K) all the way to the $2 Million range. In that time a whopping 24 homes were listed with some sort of lease purchase or leasing option. 

Of the 24 that mention leasing, only 1 home actually closed utilizing this technique.  Yes, all 23 homes found a regular ole buyer... but here's the kicker...

Of the 23 that sold tradtionally all of them sold well under the average list to sale price ratio of more than 10% in fact, it's so bad that listing your home with an option to Lease it is like a death sentence ensuring that you won't get what you want out of the home (ironic since a lease purchase was supposed to ensure that you got EXACTLY what you wanted).

With only one sale since 2007 via lease purchase, you can see why we say a lease purchase is not a purchase at all. 

4rd Marketing PodcastA 15 year veteran of Atlanta Real Estate, Joshua Jarvis is the host of 4rd Marketing Podcast - A podcast designed to help small business owners (this means Real Estate Agents) grow their business by implementing the latest in real estate SEO, local seo, digital marketing techniques and strategies.  

In addition, Joshua runs 4rd Marketing - a digital marketing agency that specializes in SEO as well as wordpress development.

 

Joshua Jarvis

Jarvis Team Realty

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Duluth GA 30097

direct : 678-999-1001
 Atlanta New Homes

Comment balloon 46 commentsJoshua Jarvis • March 22 2012 03:52AM

Comments

I always have someone asking to "rent to own" and again they never have any money so they are just renting.

Posted by Chuck Carstensen, Minnesota Real Estate Expert (RE/MAX Results) over 6 years ago

Perfect Joshua, how many want a lease with an option, but don't want to pay anything for it?  As you said, that's a RENTER.

Posted by Brin Realty Associates Team At Bean Group, Amherst NH homes and Southern NH real estate (Bean Group | Brin Realty Associates) over 6 years ago

Morning Joshua I get it a lot.  Do you have anything for a lease / purchase?  My answer is no without having to look.  And as the old saying goes NEXT and I move on.

Posted by James Dray, Exceptional Agents, Outstanding Results (Fathom Realty AR LLC) over 6 years ago

It's been a few years since someone asked me if they could potentially lease purchase a home and, at that time, what tended to happen was the market was so "hot" that invariably the seller had regular buyers competing and did not want the hassle of a renter with an option to buy. 

Posted by Lucy E. Thompson (Keller Williams Realty Premier Properties) over 6 years ago
I find they very rarely come to fruition but Buyers or Tenants do like the safety net of having the option.
Posted by Cheryl Ritchie, Southern Maryland 301-980-7566 (RE/MAX Leading Edge www.GoldenResults.com) over 6 years ago

Joshua, interesting how terminology is a little different is various areas. In my market a Lease Purchase is an offer to purchase with a settlement date sometime in the future. In the meantime the purchaser leases the property until the settlement date. Often a portion of the rent goes towards their down payment.

Terminology for what you are describing is an Lease with Option to purchase the property. A Lessee puts funds up front in the form of option money. Should the Lessee exercise the option, the funds can be put towards the down payment or whatever is negotiated between the seller and buyer. If the option is not exercised, it is nothing more than rent and the Landlord keeps the option money. This is a key factor, if the purchase doesn't go through they forfeit the option money.

Same definition with a little different terminology. Good post!

Posted by Michael Setunsky, Your Commercial Real Estate Link to Northern VA over 6 years ago

Whenever someone asks me about a lease purchase, I always ask them to give me their definition. It never includes any at risk money.

Posted by Richard Iarossi, Crofton MD Real Estate, Annapolis MD Real Estate (Coldwell Banker Residential Brokerage) over 6 years ago

I never had anyone I know in the real estate business tell me they are ever successful, especially not in the last 2-3 years.

Posted by Cheryl Thomson REALTOR Army Ret, Associate Broker in Northern Virginia ( United Real Estate (703.216.5635) cheryltee47@gmail.com) over 6 years ago

It's amazing how many calls I get from folks asking if my sellers are open for a lease option/land contract. As soon as I mention the money down, they stop talking.  

Posted by Amanda Christiansen, Christiansen Group Realty (Christiansen Group Realty (260)704-0843) over 6 years ago

I know of an investor that is using this to maintain current a bad investment. . he seems to have found a solution to his problem by temporally waiting to sell his house while a tenant/buyer makes his payments. .

Posted by Fernando Herboso - Broker for Maxus Realty Group, 301-246-0001 Serving Maryland, DC and Northern VA (Maxus Realty Group - Broker 301-246-0001) over 6 years ago

Joshua this is a great explantaion, most renters/buyers and their agents do not know what a genuine lease purchase is or what it in details. I would add the would be buyer has to be quailified to purchase a home in that price range and needs the time to save a down payment or wait a short period of time to be able to get a mortgage. I love the fact you note the deposit on the purchase because most forget about and then complain about this part. Most do want something for nothing. it is importamt to know how to do a lease purchase before asking to enter into one.

Posted by Scott Godzyk, One of Manchester NH's Leading Agents (Godzyk Real Estate Services) over 6 years ago

Lease purchase a short sale........I want to know what school they went to and who their math instructor was!

Posted by Barbara-Jo Roberts Berberi, MA, PSA, TRC - Greater Clearwater Florida Residential Real Estate Professional, Palm Harbor, Dunedin, Clearwater, Safety Harbor (Charles Rutenberg Realty) over 6 years ago

@Michael - The definitions are the same, you're talking about pure semantics for 99.9% of the buyers out there that want a lease purchase.  The whole idea is that they can't buy now but will in the future.  The purpose of the post was to show that this doesn't happen. 

Posted by Joshua Jarvis, Moving Families Forward. (Virtual Properties - Atlanta Real Estate) over 6 years ago

I cannot imagine a lease purchase with a short sale. I believe lease purchase can be a win win in some situations.

Posted by Gita Bantwal, REALTOR,ABR,CRS,SRES,GRI - Bucks County & Philadel (RE/MAX Centre Realtors) over 6 years ago

Joshua, 

Great point.  We get folks asking to do lease purchases ALL the time.  However, in 10 years in Buckhead Real Estate, we've never actually sold a home that way.  We have had tenants ask to buy and purchase the home they were leasing.  However, even then we got them to pay over appraisal, as the owner was in good shape, cash flowing well and didn't need to sell at that time.  

Folks get a gleam in their eye about the magic in this option, no magic, it is not a gaurantee!

All the best, Michelle

Posted by Michelle Francis, Realtor, Buckhead Atlanta Homes for Sale & Lease (Tim Francis Realty LLC) over 6 years ago

When someone tells me that they want to lease with an option to buy it means one thing...they have no money but want to feel good about themselves.

Posted by Edward Gilmartin (CRE) over 6 years ago

Joshua- Hey! You're right up the road from me : )

Get calls about lease to purchase all the time. I guess in theory they always think it sounds like a good idea but I haven't had a single one go all the way through.

Posted by Margie Kopp Sorrell, Lake Oconee Real Estate (Coldwell Banker Lake Oconee Realty and Lake Country) over 6 years ago

I see this as well. I think a person should either buy if they can or lease.  A purchase option to me is not like a try before buy.

Posted by Gary L. Waters Broker Associate, Bucci Realty, Fifteen Years Experience in Brevard County (Bucci Realty, Inc.) over 6 years ago

The reason so many people try this "lease purchase" is that it is the number one "technique" from these "buy homes with no money down" gurus. The person is told to rent the place out to others and then six months later the person can sell the home to some sucker for 20-100k more than the "lease option" purchase price. They are then told they have made a "profit" of 20-100k disregarding all taxes and sales costs. With these profits how many do you have to do a year? That's right, quit your day job, send me $5,000. and I will tell you this "secret" money making technique. My second book, "how to get suckers to send you $5,000 in the mail in exchange for a "secret" that is not a secret will be available soon. 

Posted by Jeffrey Smith, Short Sale Education (Author of 'Realtors Guide To Short Sale Success) over 6 years ago

Agreed.  When I was earlier in my career, I wasted many hours probably writing up 6 or 7 of these for none of them to work out.  When you can buy, then buy.

Posted by Heather Littrell, ABR,GRI,SRES Cabarrus County NC (Keller Williams) over 6 years ago

A lease purchase without down payment or option money is called... RENTING....... I swear I sing this song in my sleep.

I have only noticed two lease purchases in our MLS that have closed and one was on a home that I listed.  Note that I did not seek out this info I just happened to notice this.

Another this is that in my opinion, the vast majority of the people who have inquiry through me about a lease purchase are renters who want the owner to" believe" that they want to purchase when in fact, they really just want to rent. Here's how I explain it to them: if all you have is a security deposit, perhaps you should be seeking out a rental. That usually quiets them pretty quickly

And on top of that, you have sellers that know full well that a large majority of lease purchases do no result in a sale.  So, in fact, you have a seller who has convinced him/herself that the lease purchase is viable in order to start producing income and to somehow justify their rational.

Sorry about the long response, but obviously this is a hot button.

Posted by Charita Cadenhead, Serving Jefferson and Shelby Counties (Alabama) (Keller Williams Realty) over 6 years ago

Nice job on the feature Joshua! I've gotten calls from people who say they did a lease purchase on a short sale, now the house is in foreclosure and they've lost their money.  Then they want to know what to do.  It's never pretty.  

Posted by Jen Bowman, Realtor - Anna Maria Island & Bradenton FL (Keller Williams on the Water) over 6 years ago

Joshua, I get so many calls for lease/purchase on my listings. My seller can't buy a new home until his sells. Why would he accept a lease/purchase? Especially, given the stats you just used.

Posted by Tammie White, Broker, Franklin TN Homes for Sale (Franklin Homes Realty LLC) over 6 years ago

I bet we have more lease purchases in our market than most  but it is homes owned by investors, and it is not in the luxury market.  For the most part it is just renting because the percentage of closings that ever happen are very, very low.  

A couple of years ago, I can not tell you how many condos I showed where at the appointment the "purchaser" disclosed they wanted to lease / purchase (rent.)   This was after conversations on the phone which should have elicited this question.  Many of the condos the seller was NOT able to rent the property, legally. 

Posted by Maureen McCabe, Columbus Ohio Real Estate (HER Realtors) over 6 years ago

Of course the statement carries more weight than the actual application...If you don't ask, you will never know is appropriate here. I knew a couple who went searching for a rental and ran into a retired wealthy elderly woman that rented the place to them at half price...she didn't need the money and she liked the couple...You just never know and anything is possible

Posted by Richie Alan Naggar, agent & author (people first...then business Ran Right Realty ) over 6 years ago

Joshua, the information you are sharing here is so true. I am definitely like James (comment # 3) on this one. I just avoid them like the plague. I'd rather deal with real buyers that are qualified today.

Posted by Dominique Britton, Experience the Difference in Real Estate Services (GoHomeToAtlanta.com Realty LLC - 678.250.5022) over 6 years ago

Thanks for all the comments, I'm not for bashing buyers that can't buy unless they are trying to pull a fast one, but rather agents that let their client think this is a way to sell.  

It's a fact, you don't sell a home with a lease purchase (in Georgia).  If your goal is to rent your home out, there's a way that seems better to me.

Posted by Joshua Jarvis, Moving Families Forward. (Virtual Properties - Atlanta Real Estate) over 6 years ago

Josh,

That is great insight.  It really changes the way you look at presenting your listings to the market.  Seems like it basically stamps a great big red "DESPERATE SELLER" across the front of the listing when you put it in there.

In fact, I am writing a blog about the benefits and drawbacks to lease options for both the buyers and sellers.  I look forward to reading more of your posts.

Larry

Posted by Larry Gatti (The Gatti Group at Keller Williams Realty) over 6 years ago

If a renter/buyer is considering a lease purchase or lease with purchase option, maybe they shouldn't be buying. These are in favor of the seller, not the buyer. 

Posted by Pamela Seley, Residential Real Estate Agent serving SW RivCo CA (West Coast Realty Division) over 6 years ago

Michael #6 nails it, and I've had attorneys tell me the same thing. You can't option without option money (or some sort of consideration specifically for that purpose). If you want to lease without an option . . . well you're renting.

We get tons of these requests for riverfront properties this time of year . . . "Can we rent it for say, 6 months to see if we like it . . . then, we'll decide if we want to buy it?"  And meanwhile, the owner's got uncooperative tenants interfering with true principals. No.

Good post to clarify to consumers what they may not have learned at that seminar! :)

Posted by Candice A. Donofrio, 928-201-4BHC (4242) call/text (Next Wave RE Investments LLC Bullhead City AZ Commercial RE Broker) over 6 years ago

If only the buyers would stop asking. Why in the world would anyone lease a home to someone with no credit or money is beyond my comprehension.

Posted by Larry Brewer - Benchmark Realty llc (Benchmark Realty LLc) over 6 years ago

Each situation is different. A lease purchase option might be a solution for some sellers and may or may not indicate any type of hardship or desperation. I find no fault in sellers utilizing this method should they need to.Maybe I will push them to do two separate transactions, one a lease and one an option. Maybe I will recommend a first right of refusal. It all depends on the individual goals of the seller.

Also, it shouldn't be considered a sale, rather it should be documented as a lease as the optionee does not hold equitable title until the option is exercised.

Posted by Satar Naghshineh (Satar - Amiri Property and Financial Services Corp.) over 6 years ago

Hey Joshua,

I get the question a lot and have to explain to potential buyer clients what is actually involved in a lease purchase.  And the stats show that only about one in four tenants follow through on a purchase.

Best of success to you this year!

Posted by Jordon Wheeler, J W Group Real Estate Sales and Service (The Jordon Wheeler Group) over 6 years ago

The only way a lease purchase might actually close is with at least 10% down, credited at closing. No close, no money back. I have had a couple of lease purchase's close. Michael is correct - a lease purchase is a settlement date in the future. A promise to purchase, not an option.

A buyer may need a home now, but has one or two issues that can be worked out within 6 -12 months. I would require them to stay in touch with a lender & get regular reports. If they don't currently have the right credit, though, they better have some cash. If handled correctly, it can be a win - win for everyone.

I do not advertise lease purchase, or really look for that situation, because odds are, they will not close, the situation has to be right.

I also take that 10% and split it between agents & seller. That way, if it doesn't close, at least everyone gets a little money for their hard work. If it does close, it's deducted from commission owed, and from proceeds due from buyer. Buyer knows they are not getting that money back. It's a great incentive to close!

Posted by Stephanie Ransom Wilson, Cullman, AL Realtor, ePro, ABR, QSC (Advantage Real Estate) over 6 years ago

Thanks to all of the experts on television many buyers think that this is a great solution.  In fact, it isn't the best option for most buyers.

Posted by Kathy Sheehan, Senior Loan Officer (Bay Equity, LLC 770-634-4021) over 6 years ago

Joshua:

A lease purchase or option on a short sale doesnt' make sense to me.  A seller would be foolish to accept such an offer. 

Posted by Evelyn Kennedy, Alameda, Real Estate, Alameda, CA (Alain Pinel Realtors) over 6 years ago

We see lease purchases here sometimes. You're right it's a RENTAL where if you keep making payments you will own the house eventually. But if not, you lose it all. On a short sale, how can you even do this?

Posted by Erica Ramus, MRE, Schuylkill County PA Real Estate (Erica Ramus - Ramus Realty Group - Pottsville, PA ) over 6 years ago

I hear just about every day, "I don't have any money, do you have any rent to own houses?"

Posted by 1 ~Judi & Don Barrett & Chassy Eastep - Integrity, BS Ed, Integrity Real Estate Services -IDABEL OK (Integrity Real Estate Services 118 SE AVE N, Idabel, OK 74745) over 6 years ago

We can't do lease purchases on a short sale - the banks won't go for it.  At least the ones I've talked too.  Very interesting post.  Thanks.

Posted by Joy Daniels (Joy Daniels Real Estate Group, Ltd.) over 6 years ago

Joshua - This is an interesting analysis especially when many would think that giving the option would allow for a potential higher price.

Posted by Christine Donovan, Broker/Attorney 714-319-9751 DRE01267479 - Costa M (Donovan Blatt Realty) over 6 years ago

I steer sellers away from lease purchases...even with decent option money/downpayments.  In many cases, the buyer/tenants have depreciated the house while living there and then skipped their last few "rental" payments, leaving the seller high and dry.  The option money often does not cover the damages and unpaiid rent in the end. 

The best way is to lease your property or sell it, and not to combine the two. 

If a seller must offset his carrying costs, I recommend they qualify the people who occupy their property as a "tenant" and not a "buyer" otherwise the homeowner may get burned.

 

Posted by Athina Boukas, Certified Residential Specialist (CRS) (Virginia Capital Realty) over 6 years ago

I think the biggest misconception in a lease purchase is the fact that you are not only signing a lease, but you are signing a PURCHASE CONTRACT AT THE SAME TIME!  You have to go through the same process as if you were buying. The Atlanta market place often only has $1000 earnest money in a purchase. Anytime I have someone who trys (I'll explain try) to do a lease purchase, we get 3 times that amount.

The reason I say "try?" Because as soon as they realize they have to go through a mortgage application process (they may not qualify now, hence the need to lease for a year) so we know what the challenges are, and ask for earnest money, that if they DO NOT PURCHASE AT THE END OF THE LEASE WILL BE LOST due to non performance of their Purchase contract.......

 

.......the lease purchase conversation ends.

 

Posted by Thom Abbott, Midtown Atlanta GA Condos For Sale (MyMidtownMojo.com |770.713.1505 | Intown Atlanta GA Condo Living) over 6 years ago

Joshua... unless the definitions are different from state to state... you are taking about two different things here.  Michael in comment #6 had a good answer, and you shot it down.

This is NOT semantics.  A "lease purchase" and a "lease option, or lease with option to purchase"  may sound like the same thing, but they are very different.

A lease/purchase really IS a purchase.  It could be compared to a purchase with an extra-long escrow period, and with occupancy before closing.  During that time, an "advance occupancy" agreement is used... with the buyer paying the seller rent.  After the long escrow period is over... the purchase should be finalized with a closing and funding... just like a more normal sale... with a shorter escrow period.  A lease/purchase IS a purchase.  I don't know how many of them actually go through... but they are written as a purchase.

A "lease option" is NOT a purchase.  In a lease-option... the buyer pays the seller for the privilege of being able to sort-of have the first right of refusal after the rental period is over.  The buyer pays the seller up front... to be able to choose to buy or NOT to buy... at the end of the rental period.

A lease/option is NOT a purchase.  The renter/buyer pays the seller for the right to make a final decision whether to buy or not.  All those who seem to use the two... the "lease/purchase" and the "lease/option" interchangeably in the comments above... are incorrect.

There is a qualification, here:  I have been an agent in the Texas market, the Northern Virginia/DC/Maryland market, and the Cleveland market.  All of what I have said above IS true, or at lease was true when I worked those markets.

I do not know if these two choices... the lease/purchase... which IS a purchase... and the lease/option... which is a "maybe I will purchase after the rental period is over" and NOT a purchase... I do not know if these two scenarios are different in other states, or if they are treated the same.

My solution... ask a real estate attorney... not just any attorney, but a real estate attorney, about the difference between these two.

Also... Stephanie Wilson Cullman in comment #34 explains the differences between the two... and explains it correctly. 

Why agents continue to confuse the purchase and the option, at least in my opinion, only shows they have incomplete knowledge of the two different methods... so they talk like they are the same thing... which again, they are not.

Posted by Karen Anne Stone, Fort Worth Real Estate (New Home Hunters of Fort Worth and Tarrant County) over 6 years ago

@Karen - I didn't shoot it down.  Here's the facts, no attorney needed. 

Since 2007 in Gwinnett County, GA over 20% of the properties SOLD mentioned some sort of lease option or lease purchase.  Of those that mentioned it, less than 1/2% of those actually closed utilizing some sort of lease format.

LEGALLY they may be different vehicles, but to the seller the result is the same.  They Rented their property.

I get paid to negotiate great deals and sell properties not pontificate about the legal of difference of essentially the same thing.  I agree that having paying for an option and renting a property and promising to buy it (via a contract) are technically different. 

 

Posted by Joshua Jarvis, Moving Families Forward. (Virtual Properties - Atlanta Real Estate) over 6 years ago

Joshua... I was NOT commenting on the successful completions of the two different methods... but just trying to clarify that these are two different things.  Although both of them are more likely to NOT be completed than a normal purchase... they are two different things.  The first... the lease/purchase... is begun with both buyer and seller INTENDING on closing and transferring title after the escrow period.

The lease/option is NOT a purchase.  It is a rental with the buyer paying for the freedom to decide after the rental is over whether or not he wants to purchase.  And... this method is even less likely to end up being turned INTO a actual purchase.

In your post, you spoke of these two different methods as if they were one and the same.  They are not.  At least in the three states in which I have been licensed.  And as I said, many of the comments above also spoke of them interchangeably, as if they were the same.  They are not.

And Joshua, if you are not an attorney, I suggest you shouldn't tell anyone they do not need an attorney.

Posted by Karen Anne Stone, Fort Worth Real Estate (New Home Hunters of Fort Worth and Tarrant County) over 6 years ago

Karen - you do not need an attorney.

Surprised at a few agents here getting their underroos twisted over the wording.  Lease / Purchase and Lease with an option are different.  They're as different as Coke Zero and Diet Coke.   The contracts are different the process is slightly different, but to the seller the end result is the same.  No Sale. 

Posted by Joshua Jarvis, Moving Families Forward. (Virtual Properties - Atlanta Real Estate) over 6 years ago

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