Dear Monty: We want a lease purchase agreement for a house that we co-own with my husband’s mother. The place is free and managed. We want to buy them out in about two years.
What legal obligations do both parties have in a hire purchase? Do we have to pay her a deposit? How do we deal with real estate tax? What fees do we have to pay her monthly?
Monty: The US economy appears resilient. According to many business media, unemployment and inflation have fallen and consumers have more in the bank than they did before Corona.
The author assumes that as interest rates rise, rent-to-own properties will become more popular as they compete with booming new construction.
Is a deposit required?
Since you are already a part owner, you may not need an additional deposit.
You probably know the costs that come with owning a home. These costs include property taxes, special assessments by the community, property insurance, utilities, maintenance and repairs.
You can negotiate the range of market rental costs. For example, if you were to pay all ownership costs, how would that compare to a market rent or a higher amount for a down payment provided for in a hire-purchase agreement?
Potential hire-purchase risk
The rental amount includes an option fee and an agreed amount of money that is set aside or credited by the seller to allow the buyer to make a down payment over a period of time.
If the renter/buyer exercises the option and buys the home, the option fee and accrued decommissioning fee are applied toward the fixed purchase price.
If the buyer does not exercise the option, the lease-purchase provisions provide for a non-refundable shutdown and option fee.
Regular lease with option to buy
Since you already own shares in the house, it’s unclear if there might be options other than hire-purchase.
Her percentage of the house is vague, but a 30 percent interest in a $200,000 free-and-clear home is $60,000. That’s significant equity for a down payment. Can you back a $140,000 mortgage?
Consider an easy purchase option at a specific price on a specific date. Lenders will have different ideas about how they want to frame the contract. Visit several independent mortgage lenders before deciding on a route.
The legal obligations you asked about arise from the contract between your husband, you and your mother-in-law. If you agree, hire a real estate attorney to draft the documents.
Challenge your thinking
It also needs to be clarified why you believe that hire-purchase is the best method.
A bad credit rating or no job are one of the reasons why a home seeker enters into a hire-purchase agreement. If you work with the mother and not an outside company, you may not incur a non-refundable decommissioning and option fee.
If you choose to “rent to buy”, here are several newer options aimed at removing the stigma of fraud, as many hire to buy products are predatory in nature. Each of these companies owns the house you rent.
This author was not a customer of these companies and has not conducted any research on these companies. So you’ll have to judge for yourself, as each company is likely to be unique: Divvy, Landis, Home Partners of America, and Verbhouse.
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