BEWARE OF LEASE-PURCHASE AGREEMENTS

LANDLORDS TARGET RENTERS WITH POOR CREDIT

Question: I'm thinking of buying a house on a lease-purchase agreement. Is this a safe arrangement?

Answer: Perhaps, but be careful. Be sure everything is in writing and have a real estate lawyer look over the agreement before you sign anything. This is the most important thing you can do.

A lease-purchase agreement, sometimes called a "lease with an option to buy," allows the buyer to rent the house for a specified length of time and then buy it at a prearranged price at the end of the lease period. Sometimes all - or a portion of - the rent can be applied to the down payment.

A lease-purchase agreement can give you two very important benefits: the sale price of the house is locked in ahead of time, and you have the entire term of the lease (usually one or two years) to save the down payment.

However, lease-purchase agreements can be used by unscrupulous landlords to defraud their tenants. It is important to remember that no matter what the conditions are set forth in the option agreement, the house remains in the landlord's name and possession until the option is exercised and the deed is transferred.

Example: a house valued at $5O,OOO and which normally rents for $500 a month is offered to a tenant on a lease-purchase agreement. The rent is increased to $600 a month with the extra $100 going toward the 5% down payment of $2,500. At the end of the year, the tenant has saved only $1,200 and still must pay $1,300 to exercise the option. If the tenant cannot make this "balloon" payment, the landlord cancels the lease and pockets the extra rent.

Even if the tenant is able to pay the down payment, sometimes the condition of the house itself can be problem. The landlord may not make repairs during the term of the lease, even though he is legally responsible for the upkeep. When it comes time to buy, if the house has run down and cannot pass an inspection, the tenant may not be able to find anyone who'll make a mortgage loan on the house. The tenant might lose his money unless the contract covers this type of situation and specifies the return of any down-payment paid in.

Money to be applied to the down payment should be kept in an escrow account in the tenant's name, not in the landlord's rental account. Be sure that the lease-purchase agreement has provisions for returning all or most of any extra payments to the tenant if the sale does not go through for any reason. Consult a lawyer or a title company before you sign anything.

For answers to your housing questions call the Housing Info Line at 267-5223.