Leasing a Farm with Option to Purchase

[hey101]

A recent thread had some brief discussion on leasing-with-option-to-purchase. DH and I could soon be in a position to move to an area of SoCal where the property costs are lower and we could afford horse property.

However, DH is not totally on board with having a horse property again. From the little bit of discussion on the other thread, I thought that leasing-with-option-to-buy might be a very intriguing option for us.

Considering that we own a farm that we lease out, I have a very clear picture of the pros and cons of a straight-up lease of a farm. What I would like some feedback on is the added "option-to-buy" clause.

My current thought is to approach a seller with a 1-2 year lease with an agreed-upon purchase price for the house in two years, and a monthly lease 50% higher than a standard lease would be (ie, $1500 a month versus what would normally be only $1000/month). All lease payments to go to a down payment on the purchase. If in 1 or 2 years we want out or cannot secure a mortgage, seller keeps all lease payments (including 50% premium) and can re-sell property on the open market.

I think this could be attractive to a seller in our area because it is forecasted that the SoCal market will remain severely depressed for AT LEAST the next 2 years. Some of the places I have looked at have already sat on the market for two years, so this way the seller has income coming in AND the house will either sell to me in 2 years or can be placed on the market again.

I would really appreciate anyone, seller or buyer, who has done this to weigh in with how they structured their contract, how it worked out, things you would do differently.

Did anything change as far as the actual lease goes based on the fact that you were planning to purchase at the end of the lease (for example, who is responsible for what repairs).

Did you do an inspection prior to signing the lease or prior to purchasing the house at the end of the lease? What if some major system failed (septic, roof) during the lease but before the purchase- was there an out where you got some of that 50% premium back, or was it an SOL situation but at least you didn't have to buy the house?

TIA!

[PNWjumper]

I've just gone through this in a discussion about doing a lease-to-own option on my own farm.

The issue with the scenario you proposed is that presumably, what you would be paying with your monthly payment would be the mortgage to the owners. That means that they're not paying down principle as you make your lease payments, but most likely paying down the interest part of the loan (unless they own it outright or have had it for a long time, in which case you can ignore my post :)). So if you're talking about that extra $500 in the lease payment going towards the down payment it makes sense. If you're talking about the entire $1500 going towards the down payment you're essentially taking money out of the owner's pocket because you're taking a payment that's going towards interest (or at least partly towards interest) and asking for it to go towards principle in the form of a down payment.

Does that make sense? We walked through it with potential leasors and it absolutely didn't make financial sense to us as the owners. But my husband (who's a real estate guy) understood it much better than I did. Hopefully somebody with a better brain for finances can explain it better than I can? All I can say is that in our scenario (we've owned the farm for 8 years on a 30 year lease) it didn't work at all. But our potential leasors were going to have a tough time scraping together what we were asking for rent, let alone paying anything on top of that.

Now if you're talking about someone who's had a farm for sale for 2 years and isn't living there, it may be more attractive for them than it was for us.

In addition, you have to consider the term. If the market does start turning around in a couple of years, you could be faced with unhappy owners whose house is worth more than what you've agreed upon. It's a losing scenario for them if the market turns around before the end of your lease. It's a losing scenario for you if the market is still tanking and you're tied up in an offer. But that's all part of the negotiations and something you both may be willing to risk.

I can't help with the other terms. When we were speaking with the people who wanted to do this with our place they would have taken on all necessary repairs or property costs regardless of size. They also would have had an inspection done similar to if they were buying it outright.

[3corgis]

Hey101 - I am a broker BUT also a person who has done the lease to purchase thing twice....basic quick answer - Don't! Quick advice would be look into a lease on a property you like with the possibility of Optioning it - meaning you pay for the option/right to buy it within a certain period of time for a certain price. A bit more "cut and dry" ....otherwise, with a fluctuating market, it can be very tricky.

[3corgis]

Hey101 - I am a broker BUT also a person who has done the lease to purchase thing twice....basic quick answer - Don't! Quick advice would be look into a lease on a property you like with the possibility of Optioning it - meaning you pay for the option/right to buy it within a certain period of time for a certain price. A bit more "cut and dry" ....otherwise, with a fluctuating market, it can be very tricky.