Lease Purchase... Rent to Own... Lease Option Agreements -- An Alternative for Those With Credit Issues; But Beware

The Charlotte area real estate market appears to be stabilizing in 2012, as foreclosures continue to be absorbed into the market at a faster rate than they are replaced. In spite of that, qualifying for mortgage financing continues to be a difficult task for many buyers. One of the fundamental elements of the American Dream has always been the aspiration of home ownership, and the notion of being a renter into the foreseeable future is not something many people are content to settle for. Most people still desire to establish a home for themselves and their family, let their children settle into schools and neighborhoods and become stakeholders in their communities.

For many of these people, the Lease Option or Lease Purchase Agreement can be an alternative to renting in perpetuity. A Lease Purchase Agreement is really a "rent to own" arrangement whereby the seller and buyer agree to the terms of a purchase and sale of a property, but allow the buyer one or more years to rent the home while they address the credit issues which have disabled them from securing mortgage financing today. In the absence of the sub-prime mortgage market, a Lease Purchase Agreement can be the next best thing to home ownership. But beware. There can be serious risks.

First, in North Carolina, there is no "standard" Lease Purchase Agreement. Unlike many of the commonly used documents in a lease or a purchase situation, realtors have not been given a standard NC Bar or NC Realtor Association approved form to complete for a Lease Purchase agreement. For that reason, many realtors are at a loss in dealing with the possibility, and the parties must retain an attorney or attorneys to prepare the documents.

Secondly, and much more importantly as a practical matter, some despirate sellers have taken to agreeing to lease purchase or lease option arrangements, but do not follow through on their obligations to pay their own mortgage(s), taxes, homeowners' association and other expenses associated with ownership of the property. Instead, some simply "pocket" the monthly payments made by the lessee/buyer. The mortgage(s) go into default, foreclosure is filed. And while it is possible to check the public records where the property is located, the lessee/buyer often has no way of knowing this is going on until he or she receives a notice of foreclosure or notice to vacate the premises. This may happen five or more months into the Lease Purchase Agreement.

Then what? What recourse does the lessee/buyer have in this situation? Sure; he can sue the lessor/seller for breach of contract, and he will probably get a judgment. But what good is a judgment if the seller is essentially bankrupt and unable to pay the judgment? It isn't moral, or ethical, or fair; but it happens more often than may people entering into a Lease Purchase arrangement realize.

So the buyer is well advised to be wary of the Lease Purchase or Lease Option arrangement. Unless he knows the seller personally or is otherwise in a position to verify that the seller is making all required payments during the term of the Lease Purchase agreement, it is often much less risky to simply rent until the buyer has resolved his or her credit issues and can purchase the next home outright.