Hi - I'm now considering, instead of selling my flip, to lease purchase to my parents who cannot obtain a conventional loan and love the property we rehabbed. I understand the premise of Lease Purchase, but want to know what types of contract clauses you all prefer or employ.
The main areas of interest are:
- Must agree on purchase price at current time
- Secondarily, what is "fair" as far as discounting purchase price by expected real estate commissions to sell etc.. I suppose whatever is mutually agreeable..
- Down payment amount (they have about 6% available)
- Interest rate (probably want more than market, do you base on risk profile?)
- Length of term (15-30yr... etc) - probably whatever is affordable mutually agreeable
- Calculation of amortization schedule - I think this is standard schedule just like a bank, daily compounded interest accrued and assessed?
- How does the contract state ownership of repairs and liability of house, insurance is still owner? Which parts of liability is taken on by the Lessee?
- What happens if they fail to make payments? What are the terms there?
- Loss of down payment... under what circumstances (eg failure to pay, damage to property etc)?
- How would the Lessee sell the house or exit the Lease purchase before loan payment is up? Do they retain any value, or just walk away?
I know this isn't what you asked, but I wouldn't sell it to your parents. Either give it to them or politely ask them to buy something else.
What happens when they miss a payment? Thanksgiving dinner will be akwaaaard.
@Leland Smith , my understanding is that the LEASE contract is completely separate to the PURCHASE contract.
ie. TWO documents. In your example, 6% could be a NON-refundable deposit on their Purchase OPTION.
All monthly payments would be LEASE payments only - UNTIL they could Finance the purchase themselves.
Alternatively, if you just wanted to be their BANK, you could just owner-finance, no lease entailed.
Ask yourself: Are you prepared to be heartless if required (like a Bank)?
And/or, will you be happy for THEM to sell it later for a massive profit (instead of you)?
ie. You'd only get paid out at today's agreed price! ie. Where do YOU think values will go for your buy? My 2c...