Lease-Purchase Option

How to avoid signing your life over to a mortgage
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Hristo Botev
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Joined: Tue Jul 17, 2018 3:42 am

Lease-Purchase Option

Post by Hristo Botev » Thu May 09, 2019 11:02 am

We are considering downsizing again. We have a chance to jump at a townhouse that will be about $100K cheaper than the one we own now, and, most importantly, it's across the street from where my kids will be in school for the next 8 years, and less than a mile walk/ride from my office, so we'd be able to go from 2 family cars to 1. However, most of our NW is in retirement, HSA, and 529 accounts and in home equity. We currently only have about 10% of the purchase price liquid. So it seems like if we want to pull the trigger, our options are to either (1) get a mortgage with only 10% down (which would come with PMI, I believe); or (2) do some sort of lease-purchase option agreement with the owner of the new place, who likely would be up for such an arrangement. I don't have any experience with lease-purchase options. Any thoughts?

Chris
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Re: Lease-Purchase Option

Post by Chris » Thu May 09, 2019 2:21 pm

If some of your retirement savings are in a Roth IRA, you could potentially withdraw your contributions penalty-free to use toward the down payment. There is the obvious drawback of course.

classical_Liberal
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Re: Lease-Purchase Option

Post by classical_Liberal » Thu May 09, 2019 5:47 pm

You are planning to sell the current home, correct? How much home equity do you have? You could just write a contingent offer, this is pretty common. Or if you think that would take you out of the running (ie really hot real estate market), you could take out an equity LOC on current home to purchase the new one. If your salary:expenses are anywhere near ERE level, debt to income will probably not be an issue. If DTI is an issue, there are many "state income" equity LOC, but you'd need good credit, interest rate will be higher, and it's likely you wont be able to tap as much equity.

jacob
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Re: Lease-Purchase Option

Post by jacob » Fri May 10, 2019 8:00 am

It's also possible to borrow from your own 401k specifically to buy a house. Also, if you have saved medical receipts, those can ostensibly be cashed out (never done it, I see the HSA as an extra IRA for people with disposable income.)

No experience with lease-to-buy here. I thought that was mainly a way to screw poor people into buying depreciating goods that could then be repo'ed and resold as refurbished when payments could not be made. Thus, I have never looked into it.

Scott 2
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Re: Lease-Purchase Option

Post by Scott 2 » Fri May 10, 2019 9:41 am

My first mortgage was an 80/10/10. We had a decent rate on the 80% loan, a high rate on the 10% loan and put 10% down. It was a good alternative to paying PMI, especially since we were in a position to pay off the 10% loan a year or two after buying.

Jason
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Re: Lease-Purchase Option

Post by Jason » Sat May 11, 2019 3:37 pm

jacob wrote:
Fri May 10, 2019 8:00 am

No experience with lease-to-buy here. I thought that was mainly a way to screw poor people into buying depreciating goods that could then be repo'ed and resold as refurbished when payments could not be made. Thus, I have never looked into it.
There is a distinction between lease-to-own and a lease with an option to purchase. I believe you are thinking of the former which is traditionally called "contract purchasing", a phenomenon endemic to your neck of the woods due to mid-twentieth century migration trends coupled with discriminatory lending practices.

https://www.chicagoreader.com/chicago/c ... d=25705647

The lease with an option to purchase is a unilateral option held solely by the lessee in which he/she is entitled to purchase the property he/she is leasing under pre-determined conditions established at lease signing (this differs from a "put" where the lessee is compelled to purchase the property he/she is leasing at a future date and is required to put money towards the down payment for the sale at the time of lease signing). In a lease with an option to purchase, the monies paid during the lease term typically do not affect the sales price i.e. you are a lessee until the day you decide to purchase the property and the rent money is not a deduction and has no bearing on the sales price. As a lessee, the big question is how to address the sales price - is it pre-determined, does it escalate on an annual basis, or is it written as "fair market". Most owners do not like to grant leases with options to purchases because they can't sell the property due to the lessee's legal right to purchase it as long as the option is enforceable. There is really no benefit to the seller granting one when you can just have someone sign a lease and say "If you want to buy the property, let me know and I'll sell it to you."

A true lease with a purchase option can only benefit the lessee being that they, not the owner, are the one who can decide to exercise the option. The rest is a game and the best way to play it is by locking a sales price that you believe will be at worst, market price, and at best, below market price. Just makes sure what you are signing is a true "lease with an option to purchase."

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