Why I'll never offer a lease with option to buy again.

Buying & Selling Real Estate
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Why I'll never offer a lease with option to buy again.

Jack Forester
Investor · Cumming, GA · Member since 2016 · 153 posts · 34 votes

As a homeowner trying to sell his house (before I got into rentals) in 2011, I agreed to a lease purchase option. We agreed that $500 of the rent would go into an account to be used or a down payment, if they bought the house, with a specific purchase date a year out. As the year approached, they moved forward with the purchase and appraisal. The property did not appraise for the agreed purchase price (property prices had continued to decline over that year in my area). They had also found a newly constructed house for the same price, which is what they wanted to purchase, so they broke the contract,even after we agreed to the lower price.

We then sold to house to a new buyer.

The real estate agency that wrote the lease option sued them for the commission,but since the house was sold, the realtor had gotten their commission, so the case was thrown out.

The lease option people then sued me, demanding the $6k set aside for their down payment (even though it clearly stated that it was only available as a down payment, if they purchased our house. We hired an attorney to defend against this frivolous lawsuit and $4k in legal fees later, we won (it was ruled that the contract was clear), and we countered for legal fees. This cost $2k in legal fees, and they countered with a deal for $2k.

Having drug out for almost a year and ready to be done, we accepted.

So, the plaintiff was out $2k for a portion of our legal fees, plus their legal fees. We were out $4k for our legal fees and a year of not being able to get a loan for any property because we were named in a lawsuit. The lawyers made $6k on my side and probably the same on the plaintiff's side. All over the $6k in money towards the purchase.

Could I have refunded the money that they thought they were owed and avoided all this? Yes, but I'm not one to back down when I know I'm right.

Lesson learned? No matter how right you are, anyone can sue anyone, and the lawyers always win.

What is your experience with these?  Do you offer money towards a down payment, or how are your lease options written?

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  • Jeff Rabinowitz
    Investor/Landlord · Farmington Hills, MI · Member since 2011 · 1k+ posts · 1k+ votes
    10y

    @Jack Forester, I no longer do lease options because I am concerned about complying with Dodd-Frankenstein. (I have been doing land contracts to non-owner occupants for business purposes.) My lease option paperwork did not mention a down payment. I earned an option fee at the initiation of the transaction. That fee would be applied toward the purchase price if the tenant proceeded to purchase the house. It was clear that the option fee was mine immediately and was non-refundable. I never had this tested in court.

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  • Robert Herrera
    Investor · Denver, CO · Member since 2015 · 492 posts · 267 votes
    10y
    Jack Forester you should have done the lease option yourself, then this company wouldn't be middle manning the crap out of you. This is easy stuff to do yourself if you would take some time to learn the basics. Also, I only do about 50-150 toward the purchase price monthly as long as it's under what I make from the principle payment in my mortgage. Also I would have been happy with them leaving cause they get nothing back with my contracts. I would then get another lease option payment upfront. Message me is you have questions
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  • Brian Gibbons
    Investor · Sherman Oaks, CA · Member since 2008 · 6k+ posts · 3k+ votes
    10y

    The least risk for a seller is to get a buyer that rents for a while and give them a ROFR or right of first refusal.

    Then get the tenant down to the bank and open up a savings account, and help them get their credit looked at by a Mortgage Broker

    @Jack Forester

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  • Jack Forester
    OP
    Investor · Cumming, GA · Member since 2016 · 153 posts · 34 votes
    10y

    @Robert Herrera, and all, it was a standard "Lease/Purchase Agreement".  While I agree this should be pretty simple, at the time I was using a Seller's agent, so she wrote the contract.  Here was the specific, special stipulations language, which seemed pretty clear.

    "Buyer shall pay $1600 rent per month.  Seller agrees to apply $500/mo towards a reduction in the final purchase price"

    This was quite generous, since the going rent rate is easily $1600/mo in my area.

    So, if you don't buy, there is no price to reduce, but I guess it should have stated that it was forfeited altogether.  That said, the judge ruled that it was forfeited.

    Live and learn.   @Brian Gibbons, I like the ROFR method, maybe I'll try that if I ever do this again.

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