Lease-to-Own: Sellers Beware

As a seller, you may feel offering a lease-to-own contract is in your best interest. You are right in one way. The option allows you to immediately gain assistance with your mortgage payments; this may be essential if you have purchased a new home. The option also gets you one step closer to your ultimate goal of selling the home. Each year, hundreds of lease-to-own options are successfully executed. However, you should note that this is a very risky option that does not always pan out for sellers.

Failure to Close the Option

When you offer a lease-to-own contract, the actual verbiage should be "lease with the option to own." There is no guaranty on the front end that the borrower currently living in your home will actually go through with the purchase. Many of these individuals move into the property because they are unsure of their needs in a residence. They try the home on for size, just as they would with a car lease, and they move on if the option does not prove to be a good fit. Perhaps a greater risk is leasing to an individual choosing the option because he or she does not currently qualify for a mortgage. Of course, you will run credit and income checks. However, you will not be requiring a down payment. You cannot assure that your buyer will save toward the ultimate down payment needed to purchase your home. If the borrower does not have the money to execute the buy option, the deal will fall through, and you will be stuck with the asset all over again.

Liabilities toward the Home

In the time the leaser does live in your home, you can be exposed to multiple liabilities. You will need to set minimum insurance requirements for the leaser in order to protect against these. For example, you will require minimum renter's insurance limits and minimum liability insurance limits. Despite your best efforts, though, you may be on the hook if disaster does strike. If an event occurs that is not covered by the insurance or exceeds the limits, the leaser may simply abandon the property. You have a legal right to recover from the leaser, but it can be challenging to execute this right.

Financial Liabilities

You will have to arrange for your leaser to pay property taxes and other financial requirements while living in your home. If you do not do this, you could be paying taxes and other costs for multiple residences. Once you arrange for the leaser to do this, it will be your job to ensure it is actually completed. A tax lien against a property is issued against the property, not the owner or leaser. If any items go unpaid, even small city water bills, the property will be held accountable. You could have to pay all of these items when your leaser moves out. If they are not paid prior to the time you eventually sell the home, you will find a sale is difficult to finalize on the property.