- The Washington Times - Wednesday, November 19, 2003

Although it is rarely used in the current competitive market, a lease-to-own option can be a win-win situation for buyers and sellers who choose to use this flexible, innovative tool, Washington area Realtors say.

George Meidhof, a Realtor at Keller Williams in Fairfax, says this is how it works: A lease-to-purchase agreement combines a basic lease with an option-to-purchase contract, allowing a tenant to rent a house for an agreed-upon time, usually one to two years, with the exclusive right to purchase the home at the end of the term.

The tenant (potential buyer) pays the landlord, or seller, a nonrefundable deposit on the option, usually 3 to 10 percent, which is applied to the purchase price of the home. A portion of each monthly payment also is applied to the purchase price of the home, and the seller maintains the tax shelter by remaining on the deed.

Mr. Meidhof says he believes that for a seller, there is no downside to this type of agreement.

“If the purchaser decides not to buy, the seller has the house back and can just do it again,” he says. “The seller then has 3 to 10 percent, and the value of the house has creeped up.”

When would this scenario make sense for a potential buyer? Mr. Meidhof says buyers who have bruised credit or who just can’t qualify for a loan might want to consider leasing to own.

It is also effective for out-of-town buyers who are planning to move to the area but want to check out the neighborhood first before committing to buying a house, he says.

So if it’s a win-win, why don’t we hear more about these contracts?

Many Realtors simply aren’t aware of the option, Mr. Meidhof says, or perhaps they don’t want to negotiate such an approach because it requires a time commitment before they get their commission.

There are other considerations — notably the current demand for housing combined with historic low lending rates.

Cheri Melomet, a Realtor with Long & Foster in Reisterstown, Md., says that she understands the option and would be happy to craft such an agreement but that the current market is “just not as suitable” for this alternative.

“People who can afford to rent today can afford to buy,” she says.

Renting to own is “more suitable when the interest rates are higher,” Ms. Melomet says. “When there are tons of houses and few buyers, it works beautifully.”

The most important factors to be negotiated are the price of the home and the specific details included in the contract.

Attorney Warren Grossman, with Grossman and Associates in McLean, says that although a lease-to-purchase contract is “a wonderful thing if you can get it,” a potential buyer must have a clearly written option, and it is generally best for him or her to have a fixed price in the contract. One alternative is to negotiate a price by adding in an appreciation value. For example, say the house will sell for $350,000 plus 4 percent appreciation per year.

“But many times, the landlord will say they’ll give you the house at market value and not define it, and that can be open to interpretation,” Mr. Grossman says. “If the price is open, all it says is, ‘I’m giving you the right to negotiate.’”

The lease-to-purchase document is a binding contract with legal ramifications. If the seller dies, the seller’s heirs must honor the agreement. If the landlord decides to sell the home immediately, he or she has to give the tenant the “first right of refusal,” or the first option to buy, before selling to another party.

A contract, written clearly so both parties understand and agree to it, can help to avoid lawsuits and other complications.

“This is not something you want to write up on your own,” Mr. Grossman says.

Even with these factors to consider, Realtors agree that the lease-to-purchase strategy can be a creative avenue for potential buyers who have hit a dead end with traditional options.

John Lesniewski, a Realtor with RE/MAX 100 in Camp Springs, Md., says lease-to-own options can help sellers liquidate property in a difficult market.

It provides a great incentive to the tenant-buyer to pay rent on time and to keep the house in great condition, he says.

“They will keep it in better condition than if they just had a flat-out lease, because you are dangling the carrot of homeownership,” Mr. Lesniewski says.

If you are interested in the lease-to-purchase strategy, how do you initiate it?

As a seller, you can list your home with a Realtor as a rental with a lease-to-purchase option.

If you’re a potential buyer, Ms. Melomet suggests calling prospective landlords and asking them if they would consider such a strategy.

In addition, consider programs such as the Home Sweet Home Virginia initiative offered by the Federal Home Mortgage Corp. (Freddie Mac) with the National Association of Home Builders and the Northern Virginia Building Industry Association.

Freddie Mac launched the lease-to-purchase initiative in 2002 to help families facing barriers when trying to purchase a home.

“It’s a promising model,” says Brad German, public relations manager at Freddie Mac. The program is available to households with up to 140 percent of the area median income (currently $119,400 for a family of four) and that meet the initiative’s minimum underwriting requirements.

Mr. German says nonprofit organizations work in conjunction with bond authorities to implement the program.

After a buyer locates and qualifies for a house, the nonprofit agency buys the house and leases it to him or her for 39 months. During that time, the buyer must complete a borrower pre- and post-purchase counseling program.

“Research shows that counseling makes a big difference in a borrower’s ability to become an owner,” Mr. German says. The program works well in communities that have a local bond agency interested and motivated to provide opportunities, he says.

For information, call Landmark Property Services at 800/616-4695.

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