Challenging times demand creative solutions.  this is increasingly so in the real estate market, as motivated sellers are discovering that lenders’ strict (and sometimes seemingly arbitrary or irrational) underwriting guidelines drastically limit the pool of buyers able to qualify for mortgages to purchase a home.  of course, on the flip side of the same coin is the buyer.  many homebuyers have good, stable, verifiable employment and income; however, like millions of others, they may have filed for bankruptcy relief in the last two years, to wipe out an insurmountable mountain of credit card debt.  or they might have been among the estimated tens of thousands of people who bought a home at the height of the real estate bubble, only to find themselves hopelessly “upside-down” a few years later (that is, owing far more on their mortgage(s) than the home is worth).  many of these people have decided that a “strategic foreclosure”– simply walking away from their home– makes more sense than paying tens or even hundreds of thousands of dollars more than their home will reasonably ever be worth.  Others have attempted “short sales” that failed… or have had health problems that resulted in medical collection items appearing on their credit reports.  the net result is that there are thousands– perhaps millions– of people who would love to buy a home, but who cannot secure a mortgage commitment under lenders’ prevailing underwriting guidelines.

       up until about 2006, the “subprime” mortgage market was available to provide financing for buyers who had good employment and income, but had credit issues.  this is not the case any more.  so thousands of home sellers cannot sell homes because thousands of home buyers cannot secure financing.  And to add insult to injury, foreclosures continue to accelerate and REO’s continue to flood the market, competing with home sellers for a limited pool of buyers.  this continues to push housing prices down.  this vicious economic cycle shows little sign of being interrupted anytime soon.

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       there are alternatives for both home sellers and home buyers.  They may not be more attractive than an immediate purchase and sale, but they can beat the alternative of market paralysis and the resulting inability of homeowners to move, or inability of families to create a new home of their own.  one such alternative is the “Lease-Purchase Agreement.”

       Handled fairly and competently, a well negotiated Lease-Purchase Agreement can fill the void left by the collapse of the sub-prime mortgage market and become a ”win-win” situation for both buyer and seller.  the agreement is exactly what it sounds like.  it begins as a lease whereby a qualified (and I stress: QUALIFIED) lessee-buyer rents a home for an agreed price.  but it is also an agreement to buy the home at an price and on such terms as would otherwise be negotiated in the customary purchase and sale transaction.  When a lessee-buyer is screened by the seller to verify employment and income, and to identify those issues that make it impossible for the buyer to secure mortgage financing today, a plan of action can be established whereby that buyer can be made able to secure mortgage financing at some point in the future– sometimes not very far into the future.

       I would not recommend a Lease-Purchase Agreement to buyer or seller without having the action plan element in place from the beginning.  this will usually require an informal partnership with a mortgage lender (it can be a broker or mortgage banker) who will ultimately give the buyer the loan when he or she is made ready to qualify, and a reputable credit repair firm that can identify those issues which have hurt the prospective buyer’s credit, but can be repaired.  the credit repair firm and the lender should be willing to cooperate with each other, and it should be possible to estimate the amount of time needed to place the buyer in a position to actually close the purchase he has negotiated with the seller.

       Carefully and competently negotiated and executed, a Lease-Purchase Agreement can provide a genuine “win-win” situation for both the buyer and the seller.  it can allow the seller to move now and have sufficient monthly cash flow to cover the expense of continued ownership of a home.  it can also provide the seller with reasonable certainty that the sale of the home will close at or even before a certain date in the future.   Likewise, it can provide a buyer with a home of his or her own and a new lease on life.  If the buyer abides by the action plan, he or she has a good likelihood of being able to purchase the home he has moved into.  Families can establish themselves in their new communities… children can become acclimated to their new schools.  A “tenant” under a Lease-Purchase Agreement will tend to take much better care of the home because it will ultimately be their own.

       I have been working a lot with investors recently.  They recognize that this market presents some incredible opportunities for purchasers.  the smartest ones identify school districts that will be popular for prospective lessees-buyers, find a great purchase opportunity, and then qualify the lessee-purchaser under a Lease-Purchase Agreement.  the investor gets a good return on their investment before the home is resold, and a usually very good return on their investment when the lessee-buyer ultimately purchases the home.  both parties win big.  but the key is in the execution.  you need to have a competent “team” in place before you start the process– your broker, an attorney to review and approve the document itself, your end-lender, a reputable credit repair firm.  With the right team in place, a seller will be able to identify and qualify a good buyer, and a buyer will be able to move into his or her “new home” with the reasonable expectation that it will ultimately become his or her home.

       Solid analysis identifies great opportunities.  If you are a buyer or a seller and you would like to explore the Lease-Purchase alternative, I would be very happy help you.  it may not be for everyone, and like anything else in life, there is no guarantee that everything will go according to plan.  but that is certainly the case in every type of transaction, including the customary purchase and sale transaction.

Lease-Purchase Agreement – a Creative Financing Alternative in Challenging Times