A New Lease-Purchase on Life
For Homes That Aren't Selling, It Is An Option, but Risky
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Saturday, May 17, 2008; Page F01
The timing was all off for Catherine McAlpine and her family.
She and her husband, Richard Eig, bought a house on a double lot in their Rockville neighborhood in September 2006, at the high-water mark for prices. They planned to renovate the house and sell it, and build a house for themselves on the extra lot.
"Of course we thought we'd make a little money," Catherine McAlpine said. "We didn't anticipate the changes in the market."
When the house was listed at $469,000, there were no bids. The family dropped the price to $448,750 three months ago, and still no bids, even though a house across the street sold recently for $455,000.
They're finding that few people have $50,000 saved for a down payment, so they're going to try a lease-purchase agreement, sometimes called rent-to-own. These arrangements become more popular in difficult real estate markets because they widen the pool of potential buyers.
In a lease-purchase deal, a tenant agrees to buy the house at a set price by the end of the lease. Often, part of the rent goes toward a down payment and the tenant puts down a larger deposit than usual, which will also apply to the down payment.
There are also lease-options, whereby the tenant has a similar arrangement but is not obligated to buy the house at the end of the term. In both lease-purchase and lease-option situations, the extra deposit and rent generally are not refundable if the sale does not go through.
The agreements are attractive to people who would like to buy a house but don't have enough savings to qualify for a loan or who are waiting to sell another house to use the profit as a down payment.
For the sellers, such deals carry risks.
Roger Hayden, a Maryland real estate lawyer with 25 years of experience, said that if a buyer doesn't go through with a lease-purchase, it would probably cost the seller more to hire a lawyer to collect damages than the damages are worth.
Depending on the reason the tenant wasn't qualified for a mortgage at the beginning, that can still be a problem at the end.
Hayden said that when the buyer-tenants have damaged credit or not enough savings when they enter the lease, they often still cannot qualify for the purchase a year or two later.
