Is a Lease-Purchase Option Smart
For Sellers in a Bear Market?

Question: My husband and I have had our house on the market for approximately a month with no offers. We know it could take a long time to sell, even though we've upgraded it. Recently a real-estate agent/mortgage broker told us he has a client interested in our house, but due to "credit issues" would like to know if we are interested in a lease-purchase option. I am somewhat familiar with how this works. My concern is that the client would not have her credit issues worked out by the end of the lease and our house may have depreciated during this time, leaving us with our home worth less than it was at the beginning of the lease. Do you recommend these lease-purchase options in today's current market?

-- Heidi (last name withheld upon request), Orlando, Fla.

Heidi: Indeed I do.

For buyers, purchasing a house the traditional way is like eloping after a whirlwind courtship: They fall in love, quickly commit their emotions and resources to a house, then face disappointment and huge hassles if they later realize they made the wrong choice. Making a commitment to a home isn't so difficult in a rapidly rising market, however, since the cost of moving and finding another place to love is usually salved by a tidy profit.

But buyers are, understandably, reluctant to commit to any house when the market tanks. Offering a lease-option -- really, a long engagement between a buyer and a home -- is an extremely effective way to overcome this resistance. Buyers don't have to commit to the purchase of the house at the end of the lease period and can walk away if prices have declined or simply if the "chemistry" with the house wasn't right. Buyers with blemished credit also gain time to repair it, so they can obtain better mortgage terms.

Buyers usually are willing to compensate sellers well for removing their homes from the attentions of other potential suitors. Often, sellers get their asking price or even higher. They also get a premium on top of the monthly rent and an option fee of up to 5%, both of which are credited towards the buyer's down payment should the sale go through, but retained by sellers if it doesn't.

Naturally, there are risks involved in any sort of landlord-tenant situation, so I also suggest carefully checking the rental payment history and credit of anyone who proposes buying a house through a lease option. I also strongly advise retaining an attorney who has lots of experience negotiating these deals.

Of course, there is a chance that the home's value will go down during the lease period, but down cycles don't last forever. Offer a two- or three-year lease (likely to be attractive to someone who needs time to resolve credit problems), and chances are good that the current bear market will be history when the lease ends.

Lease-options don't work for sellers who need cash immediately to buy another house. But in this slow market, many would-be sellers who've moved on to new homes and mortgages eventually will be forced to rent out their old homes anyway. A lease-option at least ensures that they'll get top dollar for their trouble.

-- June Fletcher is a staff reporter at The Wall Street Journal and the author of "House Poor" (Harper Collins, 2005). Her "House Talk" column appears most Mondays on RealEstateJournal.com. Email your questions about the residential real-estate market. Please include your name, city and state. If you don't want your name used in our column, please indicate that. Due to volume of mail received, we regret that we cannot answer every question.

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