Understanding Lease-Purchasing of a Home

Post by Chuck Braxton, REALTOR® GRI, Roche Realty Group, Inc.
cbraxton@metrocast.net  603/677-2154

We are entering a real estate market where buyers and sellers of residential property may be more likely to consider offers structured as a lease-purchase. This article provides an overview of the lease-purchase transaction, the possible benefits for buyers and sellers, and the role of the real estate professional in it.

A lease-purchase or more formally a “lease with option to purchase” is a lease combined with an option to purchase the property at an agreed sales price within a specified period, typically two years or less.

Contract Features of a Lease-Purchase: A lease-purchase has six major provisions.
• Sales Price
• Option Period
• Monthly Rent
• Option Fee
• Security Deposit
• Option Premium

The sales price of the home and the monthly rent are market-determined yet are subject to negotiation just as in a typical purchase or rental transaction. The basis for the sales price may be a comparative market analysis (CMA) or an appraisal. The monthly rent typically has some relationship to what the loan payment would be on the sales price or to the seller’s carrying costs for the property. In general, when the option fee is higher, the rent can be lower. Rent excludes utilities and services such as lawn care and removal of snow and trash that would be the buyer’s responsibility.

The buyer pays the seller an option fee, 2% to 5% of the purchase price, which is credited to the purchase when the agreement is signed. The buyer also pays an option premium along with each monthly rent payment that is also credited to the purchase. If the purchase option is not exercised, the seller keeps the option fee and the option premium.

As with any kind of financial contract, lease-purchase transactions can be structured so that all of the benefits flow to the seller or to the buyer. However, since a lease-purchase has a solid economic rationale, it can be a win-win situation for both parties.

Under New Hampshire law, the security deposit cannot be more than one month’s rent and does not necessarily have to be in an interest bearing account. The lease-purchase contract might provide that the security deposit would be refunded unless the buyer elects to credit it to the purchase price at closing.

The option period, option fee, and option premium are balanced to meet the needs of both parties. Let’s examine the reasons why buyers and sellers might consider a lease-purchase transaction.

Buyer Motivations to Consider a Lease-Purchase

Buyers enter a lease-purchase transaction for several reasons. Here are some typical buyer profiles. Professional employees who are relocating and who do not have generous relocation benefits may find the lease-purchase is a way to buy a home while absorbing the added one-time costs of relocating, and, once settled, the buyer will be in a better financial position with lenders. In these cases, buyers also save the cost and hassle of moving twice.

Many buyers have property to sell outside the Lakes & Mountain Region of New Hampshire in order to buy here. Or, buyers may have timing issues regarding the sale of a property that affect their ability to purchase now. These buyers are typically interested in properties here priced in the range of $350,000 to $800,000 or more. Since buyers know that seller’s are unlikely to accept an offer contingent upon sale of the buyer’s property. Thus, a lease-purchase transaction can create a way for both parties to move ahead.

Another group is buyers, typically making a job-related move to the Region, who had been considering rental properties. Using a lease-purchase can provide an inventory of properties in better locations and with more features than what may be available in the long-term rental pool in the area. Looking at properties priced at $300,000 or less, these buyers might have settled for an expensive but unsatisfactory rental unit. Thus, a seller willing to consider a lease-purchase can access this pool of potential buyers.

All buyers considering a lease-purchase should consult with a mortgage lender at the outset to obtain detailed guidance. The lender may have suggestions on  structuring the lease-purchase agreement so that fits the buyer’s situation and the lender’s underwriting criteria. This information should be fed back to the real estate professional preparing the offer or, better yet, have the agent and lender talk directly.

Even though the option fee is non-refundable, the right not to exercise the option may also have value to some buyers. If there are changing professional demands on the buyer or something wrong with the house, the neighborhood, or the neighbors, the money left behind on a lease-purchase is smaller than the costs of an outright purchase followed by a sale within two or three years.

Seller Motivations to Consider a Lease-Purchase

While most home sellers want a cash sale, for those who are prepared to hold onto their property for a while longer, the benefits can be compelling.

For example, consider a seller who has a property that is appealing in many respects but may be underdeveloped compared to the value of the underlying lot. In such a case, the seller may face difficulty in having the property appraise for the asking price. When the property fails to appraise, the buyer in a conventional purchase contract can exit the transaction unless the seller agrees to accept a lower purchase price that is in line with the appraisal. The lease-purchase provides a way to realize a higher price while buyers to get the property they want and build equity. The change in the buyer’s position benefits the seller so a longer option term can be an advantage to both parties.

A changing market can be another reason for sellers to consider a lease-purchase. Whenever the market shifts from a sellers’ market towards a buyers’ market, there are more homes for sale, time on the market increases, and perhaps the cost of home mortgages goes up reducing the purchasing power of buyers and, thus, the number of buyers in the market. The lease-purchase can broaden the market and reach buyers who are on the sidelines while being less risky than a straight rental because of the option fee and rental premium.

The Role of the Real Estate Professional in a Lease-Purchase

Buyers and sellers should seek a real estate agent equipped with the tools and the team to evaluate, negotiate and structure a lease purchase transaction. Tools include (i) financial spreadsheets that illustrate the affects of various terms over the life of the transaction on the buyer, the seller and the real estate agencies involved and (ii) a term sheet to communicate and negotiate the essential provisions of the transaction. The tools work hand-in-hand with real estate legal counsel available to the seller that is experienced with lease-purchase transactions and the needs of mortgage lenders for such transactions.

From the seller’s viewpoint, most listing agreements do not adequately cover a lease-purchase transactions, so it is likely that the listing agreement will need to be amended to ensure that the services and compensation under a lease-purchase are thoroughly covered and to parallel the specific terms of the lease-purchase including an extension of the listing agreement through the end of the option period.

When sellers want the listing agent to proactively promote lease-purchase of their property in the marketplace, the listing agreement can be amended broadly to cover terms such as seller’s constructive receipt of the option fee, extension of the listing agreement through the end of the option period, and other model terms. In addition, a rental listing agreement should be executed to incorporate terms regarding the definition of the monthly rental rate, property rules, and security deposits.

Once a lease-purchase agreement is in place, the major services that the real estate professional and agency provide will include escrow, collection, and accounting  services to monitor the lease-purchase agreement. Since the listing agency is deferring its compensation until the option is exercised, part of the commission earned may be paid out of the option fee and rent premium or a sizable portion of the option fee may be held in escrow by the agency.

About the Author: Chuck Braxton is a REALTOR® with the Meredith office of Roche Realty Group, Inc. He has applied his 25+ years of experience as a business executive to the challenges facing sellers and buyers of real estate in the Lakes & Mountains Region.  His website is www.ChuckBraxton.com . Mr. Braxton may be reached at 603/677-2154 or toll-free at 800/926-5253 ext. 342 any time of day or evening, or by email at cbraxton@metrocast.net.

Gunstock Mountain in Gilford, NH

Gunstock: Gem of the Lakes Region

Nestled among the stoic peaks of the Belknap Mountain range in the heart of New ...
Read More →
Roche Realty Group Announces Top Producers for 2023

Roche Realty Group Announces Top Producers for 2023

Meredith — Frank Roche, president of Roche Realty Group, announced the top five producers for the ...
Read More →
AI and the Future of Real Estate

AI and the Future of Real Estate

Imagine, if you will, looking at a mysterious picture box filled with a whole world ...
Read More →
Prices rise Broadview Condominiums originally sold to the developer for $500,000

Prices Rise Ahead of Super Bowl Sunday

We’ve got a great match coming up for this year’s Super Bowl…The 49ers vs. the ...
Read More →
Smart Moves in Condominium Ownership Samoset

Smart Moves in Condominium Ownership

Here in the Lakes Region, a good part of our residential housing inventory is in ...
Read More →
Land Sales Unveiled: New Hampshire's 2023 Market

Land Sales Unveiled: New Hampshire’s 2023 Market

New Hampshire The Granite State… true to its motto, “Live Free or Die”, which encapsulates ...
Read More →
Exploring Cash Sales Dynamics in Lakes Region Real Estate

Exploring Cash Sales Dynamics in Lakes Region Real Estate

I was at a sales meeting at Roche Realty Group the other day, and we ...
Read More →
Roche Realty Meredith

Roche Realty Group Reports Over $150 Million in Sales

               Meredith- Frank Roche, President of Roche Realty Group, Inc., ...
Read More →
Lincoln, New Hampshire Riverwalk Resort

Lincoln, New Hampshire: From Mill Town to Ski Destination

Tucked in the heart of New Hampshire, sprawling across 131 square miles of varied terrain, ...
Read More →
Lakes Region Towns Stand Out For Their Spirit of Giving

Celebrating the Spirit of “Giving” in the Lakes Region

Nestled in the picturesque landscapes of New Hampshire, the Lakes Region stands out not only ...
Read More →
AI's Impact on the future of real estate

Real Estate’s Future: The Impact of AI

The other day, I was talking with my son Chris about the changes in the ...
Read More →
NH Lake Sales Activity - picture of lake with mountains and homes

Lakes Region Waterfront Sales 2022 vs. 2023

We’re getting near the end of the year, and I thought I would pull up ...
Read More →
Winter Snowmobile

Real Estate in a Winter Wonderland

As I drove around the other day with my kids, I was looking at some ...
Read More →
Toys for Tots Drive

Roche Realty Host Annual Toys for Tots Drive

As the holiday season approaches, Roche Realty Group is excited to announce the kickoff of ...
Read More →
Small Business Saturday New Hampshire

Small Business Saturday Living Gratefully in New Hampshire

We have so many things to be thankful for here in New Hampshire: plenty of ...
Read More →
Annie Brown Joins Roche Realty Group

Annie Brown Joins Roche Realty Group

Meredith — Frank Roche, President of Roche Realty Group, Inc., with offices in Meredith and ...
Read More →
Gunstock Mountain in Gilford, NH

Gunstock Upgrades for Winter as Real Estate Shows Resilient Growth

As the leaves of New Hampshire’s forests transition from the vibrant hues of fall to ...
Read More →
Preserving New Hampshire's Lakes

Preserving New Hampshire’s Lakes: A Community Effort

With over 250 lakes and ponds throughout New Hampshire’s Lakes Region, there are unlimited outdoor ...
Read More →
Home Inspections — The Uninspected Abode: A Spine-chilling Tale of Regret and Terror!

The Uninspected Home: A Spine-chilling Tale of Regret and Terror!

One night, not many years ago, in a quaint, somber town nestled amidst the haunting ...
Read More →
Interest Rates

Interest Rates Impacted by Treasury Yields

It looks like the national picture for housing stats has not improved in recent months; ...
Read More →
Local Housing Crisis: Challenges and Solutions

Local Housing Crisis: Challenges and Solutions

Our communities are facing a shortage of both residential and commercial properties, a scenario that’s ...
Read More →
Fall Splendor In New Hampshire

Fall Splendor in New Hampshire

New Hampshire in the fall is akin to stepping into a live canvas painting — ...
Read More →
Samoset Condominiums on Lake Winnipesaukee

Condominium Sales Surge in New Hampshire’s Lakes Region!

As we start entering October’s bright fall colors, I thought I’d take a look at ...
Read More →
Empowering your offer

Empower Your Offer in a Sizzling Real Estate Market!

As a seasoned real estate professional, I often consider the market conditions to keep myself, ...
Read More →
Reviews of New Hampshire's Lakes Region

Reviews of New Hampshire’s Lakes Region

We’ve had a great summer in New Hampshire’s Lakes Region, and we’re approaching the brilliant ...
Read More →
Waterfont Sales Activity Wolfeboro, New Hampshire

Waterfront Sales Activity in the Lakes Region

As we head into September, I have compiled data and insight into what is happening ...
Read More →
Labor Day Weekend

Labor Day Weekend in The Lakes Region

Labor Day Weekend has arrived, and the weather forecast for the Lakes Region looks fantastic, ...
Read More →
Interest Rates

The Mortgage Interest Rate Dilemma

This past week, we saw an increase in mortgage rates following a rise in bond ...
Read More →
Best State To Live In — New Hampshire at #3

New Hampshire 3rd Best State To Live In!

WalletHub just released its rankings of the best state to live in for 2023. It’s ...
Read More →
City/Town Comparison can make the research process easier

City/Town Comparison For Your Move

Some studies place moving to a new location as one of the top ten most ...
Read More →
New Hampshire Real Estate Lacks Inventory

New Hampshire Real Estate Inventory Crisis

A Multifaceted Analysis of Rising Interest Rates and Beyond New Hampshire is currently facing a ...
Read More →
Peaks of New England

Exploring the Peaks of New England

In my younger years in school, I always loved geography. Living in New Hampshire, there ...
Read More →
Climate Exodus: Insurance Companies Seeking Refuge from High-Risk Sates

Climate Exodus: Insurers’ Fleeing High-Risk States

Flooding, Forest Fires, Heat Waves, Tornados, oh my! The recent stretch of weather has certainly ...
Read More →
Real Estate News Headlines - Lakes Region NH

Real Estate Tidbits to Consider

Here are a few real estate tidbits I’ve pulled to keep you up to speed ...
Read More →
Roche Realty Group Sells out Lakeside at Paugus Bay

Roche Realty Group — 6 Months in Review

Closed sales for the first 6 months of 2023 have been impressive at Roche Realty ...
Read More →
Newfound Lake

Lakes Region Waterfront Sales Activity 6 Month Comparison

Below you will find data and insight into what is happening in sales activity on ...
Read More →
Buying Land

Buying Land in New Hampshire — Comprehensive Guide

New Hampshire, also known as the Granite State, offers a diverse landscape that includes picturesque ...
Read More →
Weirs Beach: A Tale of History, Community, and Natural Beauty

Weirs Beach: A Tale of History, Community, and Natural Beauty

As we celebrate the 100th anniversary of the oldest bike week in the country, let’s ...
Read More →
First Five Months of Lakes Region Real Estate

Five Months of Lakes Region Real Estate Activity

The month of May’s real estate statistics just came out for New Hampshire, and it ...
Read More →
A bird's eye view of Long Bay on Lake Winnipesaukee

South Down Shores and Long Bay on Lake Winnipesaukee — Its History

When construction started in 1981, Laconia’s South Down Farm offered a picturesque setting for condominium ...
Read More →
Memorial Day — rows of gravestones with flags in military cemetery

Memorial Day Weekend Arrives in the Lakes Region!

The long-anticipated Memorial Day weekend has arrived after a long winter, and the Lakes Region ...
Read More →
Unlike the dandelions new listings aren't popping up in the Lakes Region

Will Listings Start Bloom Like Dandelions?

Will Real Estate Listings Bloom Like Dandelions? During my rides around the Lakes Region, I’ve ...
Read More →
boat launch

Public Boat Launches in the Lakes Region

New Hampshire’s Lakes Region is a paradise for boating enthusiasts and we are now entering ...
Read More →
Real Estate Scams

Real Estate Scams to Be Aware of

One of my Realtors® received a call today from a gentleman purporting to be the ...
Read More →
Brant Point Lighthouse, Nantucket overlooking the ocean

From the Lakes Region to Nantucket

I spent a few days on Nantucket Island this past week for a quick getaway. ...
Read More →
Lakes Region Real Estate Is Still Hot

Lakes Region Real Estate Market is Sizzling

The real estate market in the Lakes Region and the state of New Hampshire is ...
Read More →
Lake Winnipesaukee Kayak

Buying a Lake House — Where to Start?

Owning a waterfront home in New Hampshire’s Lakes Region is a treasured experience. For many ...
Read More →
Home improvements

Home Improvements Before You Sell

One question I commonly get asked is, “What type of projects or improvements should I ...
Read More →
Single-Family units are down

How’s the Lakes Region Market Looking?

We’ve already passed the first quarter of 2023 for real estate sales in New Hampshire’s ...
Read More →
Moving into new home young happy couple celebrating toast Champagne

Buying a Home? Follow These Tips & Tricks

Spring has officially arrived and launches the beginning of our spring selling season for real ...
Read More →

Leave a Comment