Lease Purchase vs. Owner Financing

Atlanta, Georgia

Creative Real Estate Financing

Lease Purchase vs. Owner Financing

Realtor · Macon, GA · Member since 2020 · 25 posts · 13 votes

I'm looking to purchase a home and was planning on having the owner finance 1/2 of the purchase price. I figured that I would put 50% and then have the owner carry the remaining amount and then we would have a balloon payment after 3 years. We worked up the numbers and all seemed good. But then I found out that the 50% I was putting down wasn't enough to pay off their existing loan and leave them enough to put down on their next house. So they decided to do a lease purchase. In this scenario I would put less money down but pay more per month (to help them cover their mortgage payments and allow them to purchase their next house). That's all good to me, but it worries me to put a big chunk of money down, if their mortgage isn't paid off. Worst case scenario, they default on their mortgage (of the house I am lease purchasing) and the bank forecloses. Then I'm out of a house and a large down payment.

I've asked several RE friends about this and no one has a great answer for me. I'll obviously run all of this through a RE attorney, but would like to have a good understanding of the ins and outs of this transaction. I want to make sure my money is safe and I'll be able to refinance out of this lease when I'm able to get a mortgage. (I'm a new Realtor so I can't get a mortgage right now).

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Michael J.
Real Estate Agent · Greenville, SC · Member since 2021 · 210 posts · 142 votes
3y
Based on your situation, it appears that a "subject to" real estate deal might be a suitable solution for both you and the seller. Here's a possible scenario for taking over the property subject to the existing mortgage:

1. Consult with an experienced real estate attorney to help you draft a subject to agreement. This is crucial for ensuring that your interests are protected, and the terms of the deal are clearly outlined.
2. In the agreement, specify that you will be taking over the property subject to the existing mortgage. This means you'll be responsible for making the monthly mortgage payments on behalf of the seller, but the mortgage will remain in their name and the property is deeded over to you.
3. As part of the agreement, negotiate the terms for your down payment and monthly payments. You mentioned putting 50% down in the beginning. Determine if that will cover their equity in the current house and that should help the seller facilitate the purchase of their next house.
4. To protect your interests, include in the agreement that you will use a 3rd party servicing company to make the payments to to ensure that they are going to the mortgage company. This way, you'll have some protection from the seller defaulting on their mortgage and the property goes into foreclosure.

5. Additionally, include a clause in the agreement that allows you to refinance the property and obtain a new mortgage in your name once you're able to qualify for one. This will enable you to eventually remove the seller's mortgage from the equation.
6. Work closely with your real estate attorney to make sure that all the paperwork is done correctly.
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Chris SeveneyBusiness Member
Moderator
Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
3y
@Cody Lekberg
Why don’t you just buy the house without owner financing?
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Cody Lekberg
OP
Realtor · Macon, GA · Member since 2020 · 25 posts · 13 votes
3y
Quote from @Chris Seveney:

@Cody Lekberg
Why don’t you just buy the house without owner financing?
I left my salaried job in March and just got my real estate license last week so I don't qualify for any sort of a traditional loan. I talked to a local bank who thought they might be able to front the other half of the purchase, but it turns out they weren't able to.

I've been a homeowner for 20 year and have perfect credit. I'm clearly not going to put 50% down on a house and then default on it...but it's tough to convince a bank of that.

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Cody Lekberg
OP
Realtor · Macon, GA · Member since 2020 · 25 posts · 13 votes
3y
Quote from @Michael J.:
Based on your situation, it appears that a "subject to" real estate deal might be a suitable solution for both you and the seller. Here's a possible scenario for taking over the property subject to the existing mortgage:

1. Consult with an experienced real estate attorney to help you draft a subject to agreement. This is crucial for ensuring that your interests are protected, and the terms of the deal are clearly outlined.
2. In the agreement, specify that you will be taking over the property subject to the existing mortgage. This means you'll be responsible for making the monthly mortgage payments on behalf of the seller, but the mortgage will remain in their name and the property is deeded over to you.
3. As part of the agreement, negotiate the terms for your down payment and monthly payments. You mentioned putting 50% down in the beginning. Determine if that will cover their equity in the current house and that should help the seller facilitate the purchase of their next house.
4. To protect your interests, include in the agreement that you will use a 3rd party servicing company to make the payments to to ensure that they are going to the mortgage company. This way, you'll have some protection from the seller defaulting on their mortgage and the property goes into foreclosure.

5. Additionally, include a clause in the agreement that allows you to refinance the property and obtain a new mortgage in your name once you're able to qualify for one. This will enable you to eventually remove the seller's mortgage from the equation.
6. Work closely with your real estate attorney to make sure that all the paperwork is done correctly.
Wow! This is great. I know about Subject To, but you explained this better than I've ever heard. Thank you!
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Account Closed
Investor · Scottsdale Austin Tuktoyaktuk · Member since 2021 · 4k+ posts · 4k+ votes
3y
Quote from @Cody Lekberg:
Quote from @Michael J.:

Based on your situation, it appears that a "subject to" real estate deal might be a suitable solution for both you and the seller. Here's a possible scenario for taking over the property subject to the existing mortgage:

1. Consult with an experienced real estate attorney to help you draft a subject to agreement. This is crucial for ensuring that your interests are protected, and the terms of the deal are clearly outlined.

2. In the agreement, specify that you will be taking over the property subject to the existing mortgage. This means you'll be responsible for making the monthly mortgage payments on behalf of the seller, but the mortgage will remain in their name and the property is deeded over to you.

3. As part of the agreement, negotiate the terms for your down payment and monthly payments. You mentioned putting 50% down in the beginning. Determine if that will cover their equity in the current house and that should help the seller facilitate the purchase of their next house.

4. To protect your interests, include in the agreement that you will use a 3rd party servicing company to make the payments to to ensure that they are going to the mortgage company. This way, you'll have some protection from the seller defaulting on their mortgage and the property goes into foreclosure.

5. Additionally, include a clause in the agreement that allows you to refinance the property and obtain a new mortgage in your name once you're able to qualify for one. This will enable you to eventually remove the seller's mortgage from the equation.

6. Work closely with your real estate attorney to make sure that all the paperwork is done correctly.

Wow! This is great. I know about Subject To, but you explained this better than I've ever heard. Thank you!
There ya go. He saved you $5,000 you didn't have to pay to take a Subject To mentor class. ;-)
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Wendy PattonBusiness Member
Real Estate Consultant · Clarkston, MI · Member since 2009 · 864 posts · 350 votes
3y

@Cody Lekberg agree about putting much less down if you don't own it. AND i would make sure 100% of what you put down goes to the mortgage, if you can. However, with a lease purchase there is more risk because they still own it. Agree with above to do a subject -to or pay 50% towards the mortgage and subject to for the rest...... VERY little risk for the seller at all. or do you have Land Contracts in GA or can you have the seller do a wrap mortgage from them to you and they keep theirs in place (but you put your down against theirs so it is very small? a few ideas
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