Protect yourself in a lease-purchase deal

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Dear Steve,
I am currently listed with an agent.  If I sell with a rent-to-own agreement, does the agent still get a percentage of the commission? Or should I wait until the listing runs out? What should one be cautious of in these deals?
— P.F.

Dear P.F.,
Though it depends on the terms of your agent listing contract, you are almost certainly obligated to pay a commission or fee if the agent brings you the rent-to-own buyer during the listing term.

Even if the listing expires, there is an ethical, if not legal, obligation to the agent if you cut a lease-purchase deal with someone that the agent previously presented to you. Otherwise, you’re free to sell or lease, with no agent obligations when your listing expires.

Agents aren’t always thrilled with lease-purchase deals because they know that the majority of buyers don’t or can’t execute the purchase portion at the end. But many are willing to accept them today in light of the weak market.

As for pricing, the online agencies that promote these types of deals typically use a contract that will compensate listing agents with 1 percent of the purchase price upon execution of a rent-to-own agreement and the balance, from 2 percent to 2.5 percent of the purchase price, upon completion of the purchase option. Since the terms of these deals can span up to four years, lease-purchases are not exactly enticing to agents.

Here’s a quick lease-option primer. In most rent-to-own deals, the seller receives a nonrefundable deposit plus above-market rent payments which accumulate into the equivalent of a down payment. When — and if — the purchase is executed at the end of the lease term, the seller receives a payment equal to the agreed-upon purchase price, less transaction costs and that aforementioned agent commission.

There are some cautions here. The thorough vetting of candidates’ credit, salary and work histories is critical. Realize that frustrated buyers are more at risk of trashing the place or refusing to leave if they’re unable to consummate their purchase.

Moreover, many lease-purchase buyers will not be able to better their credit scores by the end of the lease term. Merely handing you their rent check on time will not raise their score – promptly paying down credit cards and loans will.

The big plus to this sort of arrangement for you is that it offers you a steady source of above-market rental income if you can’t sell your house conventionally.

As an aside, one of the big problems with lease-to-own pacts that were executed in the past few years is that buyers often can’t get financing to complete the deal if the value of the home has dropped significantly, which in far too many cases, it has. Hence, those buyers face paying out additional down-payment cash at the end of their lease term to meet lender loan-to-value requirements.

A thorough lease-purchase contract is a must here, and it should allow for price adjustments should market fluctuations threaten the original deal structure. You will also want to spell out who is responsible for maintenance and repairs and what will happen if the buyer misses lease payments or you miss mortgage payments.

Some lease-to-buy buyers will want the contractual right to assign their purchase option if they can’t exercise it themselves. A veteran agent specializing in lease-purchase deals or a real estate attorney would come in handy hammering out this sort of contract.

Good luck!