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By Ilyce Glink
11/7/2008 8:00:00 AM
Q: I am being transferred from a large East Coast city to a medium-size city in the South. I plan to retire within the next five years; my wife and I do not want to buy now but may be willing to retire there if we enjoy the locale and the climate, so we would like to rent a home and do a lease-purchase, if feasible. What items should I ensure are covered in a lease-purchase agreement so that an eventual purchase may occur with a minimum of trouble?
A: Thanks for your question. In the current economic environment, you would be ill-advised not to use a real estate attorney to assist you in a lease with an option to buy or in any other type of transaction that delays the purchase of a home for a lengthy period of time.
In a lease-purchase, you are effectively a renter for some time until you decide to purchase the home. While you lease the property you have to review the document in light of the landlord-tenant relationship. You have to decide who will have to pay for the cost to maintain the property with a view towards those major components of a home that can have problems and then deal with the minor maintenance items.
As a tenant of the property, you need to remember that you do not own the property. You should not invest in the home, make improvements to the home or spend much money on the home until you decide to buy the home and exercise your rights under the lease-purchase and have closed on the home.
When the document deals with the purchase side of the deal, you need to be quite careful. If you are putting money down to assure your seller that you will buy the home, you need to know that your down payment is safe. You also need to make sure that the seller will have the ability to close on the deal when you decide to exercise your rights to purchase the home.
So what do you need to look out for? As a general rule, you need to make sure that the person you are dealing with owns the home and can sign documents with you as both landlord and seller of the home. You also have to negotiate the manner in which the owner will take care of the property and won't take actions that will disturb your living in the home. It won't do you much good to live in the home if the seller treats the home as his and deprives you of your privacy and joy of living in the home.
The owner has to maintain the home until you close on the purchase. If you take care of the ordinary and routine maintenance of the home, your documentation needs to set up a mechanism for you to make sure that (1) the owner has homeowners insurance to pay for damage caused to the home by a casualty, (2) the owner is current on his mortgage payment to avoid losing the home to the lender, and (3) the owner is current on his real estate tax payments and homeowner association fees and dues to avoid losing the home to the taxing authorities or association.
If the owner fails to keep any of these items current, you could find yourself homeless in the future even if you have been a model tenant.
If the owner maintains the home, pays the real estate taxes, mortgage and homeowner association payments, you should be in a good position to close when you decide to purchase the home in the future.
But you also need to treat the home as a purchase at some point in time; your documentation for the lease-purchase might require the seller to provide you with a title insurance report. Depending on the lease-purchase arrangement and how serious you are about buying the home, you might be better off knowing early on whether anything affects the title to the home now rather than later.
If you lease the home and wait a year or two to review the title to the home, you might be surprised by what you find. While you might not be obligated to purchase the home if the title report shows something you don't like on the title, you will not have wasted a year or two in a home you can't or won't purchase.
Lastly, any money held by the seller for the purchase of the property should be held by a third party that can hold the money and would not disburse that money until the deal closes, or if you decide not to purchase the home, the deal dies and you move somewhere else.
These are just some of the issues to look out for; work closely with your real estate attorney when you are drafting the documents to avoid any surprises later on.
To get even more valuable advice from Ilyce, visit her Personal Finance and Real Estate Center.
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