Home Lease Purchase Program

April 20, 2020
Home Lease Purchase Program

I just spent the last couple of hours going over a home buying program with a good friend of mine who is a realtor.  It is structured as a lease to purchase arrangement, but is much better than the train-wreck lease-purchase options that our clients often enter into with shady or unsophisticated sellers before they come see us.  This program will allow our clients, in essence, to purchase a home immediately after their Chapter 7 case is discharged, and more importantly, while a Chapter 13 client is still in Chapter 13.

My friend has been in real estate here in KC for over 30 years.  He helped one of our paralegals buy a house back in 2017.  My friend has also represented all of our probate estate clients who have had a house to sell in their estates.  Bottom line, he does a great job and we know him well.

My friend has been trying to get a few hours of my time for the past several months to tell me about this new program, and today I finally had the time to talk to him.  I feel bad because this program looks really, really good to me and I think it will be very beneficial to our clients.  It appears to be one of those rare “win-win” situations where everybody benefits.  Frankly, I went into the meeting thinking “OK, what’s the catch?  Where is the fine print that ends up costing our clients way more than it should?”  I’ve seen many bankruptcy-related automobile offers over the years, and there’s always a catch.

The company that underwrites the program is a national company that is connected with one of the major national residential real estate brokerages, so they are legit.  And based upon my review of the terms, they certainly are going to make a profit.  But, the terms seem very reasonable to me.  If not, I wouldn’t recommend the lease purchase program.  My friend and I waded through the terms and fine print.  We called the company to clarify a couple of issues.  I’ve condensed the terms down to the major items for you below.  Even though the lease purchase program is shut down at the moment due to Covid-19, it will re-open as soon as the lockdown ends.  So, I think we will have some current clients that will be interested right away.

As for future clients, I am constantly being asked “how long will it be before we can buy a home?”  For Ch 7 clients, the answer has been “2 years after the case has closed” – which can be quite a while longer than 2 years if it is an asset case.  For Ch 13 clients, the answer is “2 years after your case is done – so that might be 7 years from now if your case goes for the full 5 year term.”  But now, the answer is “right away”.  In fact, this “when can I buy a home” issue is so important that I have had many clients choose to file Chapter 7 when they really needed a Chapter 13 simply because their goal was to buy a house soon.

So, what’s in it for WM Law?  Well, for one thing, I think the program fulfills a need and desire of our clients to become homeowners, and that makes for happier clients for our firm.  Realizing that we will end up having to walk clients through the process, answer lots of questions and end up giving our opinion on whatever deal they are going to enter into, I have asked my friend to propose that WM Law be paid a flat $1,000 attorney fee from closing escrow as a closing cost to represent our clients throughout the transaction.  I think that’s a pretty fair attorney fee to explain the program, evaluate the specific terms of the deal and make sure our client is treated fairly throughout the process and the closing on the home.  The client will not have to pay the attorney fee out of pocket upfront – it will be paid like any other closing cost from escrow by the company.  If that cannot be done, we’ll let our clients pay us after moving in at $250 per month for 4 months.  Also, if the client is in a Chapter 13 case, we will need to file a Motion to Incur Debt so the court can approve the client to enter into the deal – we will get a post-confirmation fee paid through the Chapter 13 plan for filing that motion (currently, the court allows $150 for filing that motion).

As I said above, I think this is one of those rare “win-win” situations, and it has a lot of potential.  The negative impact on the ability to buy a home is a key factor for many when deciding whether to file bankruptcy.  This should be a relief to many people.

Here is my synopsis of the key terms of the lease purchase program.  Of course, this is just a summary and the complete terms are available for the client when the application is made to get started with the lease purchase program:

  • Our client will be referred to a local licensed real estate agent with over 30 years’ experience in Kansas City and is experienced and certified in the lease purchase program who will represent the client
  • With the help of the real estate agent, our client chooses a home either from the company’s list of approved properties or finds a home that will qualify
  • The purchase price of the home will be negotiated by the client’s real estate agent
  • If the house chosen by the client needs some repair or updating, those costs can be added to the purchase price of the home at closing so that the client does not need to pay out of pocket
  • Rent is roughly 68% of 1% of total house purchase price including closing costs. For example, a house with a total purchase price of $100,000 would have a monthly rental rate in the range of $680
  • Required deposit is 3 months of rent
  • Client must also pay first month’s rent prior to move-in (on top of deposit)
  • Rent itself does not apply to the purchase price of the house
  • The 3 months deposit is refundable upon move-out (with conditions) if the client doesn’t exercise the purchase option, or if the client does buy the house, the deposit will be applied to the purchase price
  • Lease terms are 12 months at a time. The lease can be renewed up to 4 times for a total of 5 years of occupancy while retaining the right to purchase
  • Lease payments automatically increase 5% each year if the lease is renewed
  • If and when the client exercises the purchase option, the purchase price is the total price paid for the house, including all of the closing costs
  • Purchase price of house automatically increases 3.5% each year during the lease
  • Applicant will not be approved for the program until his or her Chapter 7 case is discharged
  • Chapter 13 client applications will not be approved until case is confirmed and plan payments must be current
  • Most pets are allowed
  • Minimum annual household income of $45,000
  • Stable employment required
  • No disqualifying criminal history
  • Application date to move-in date in as little as 45 days
  • Single-family home or townhome only (no condos or trailers or modular homes)
  • Minimum of 2 above-grade bedrooms
  • Maximum of 2-acre lot
  • No short sales, REO or auction properties
  • No material deficiencies (i.e. major structural issues)
  • House closing costs will include $1,000 in legal fees to WM Law for representing our client during the process, or if not allowed, WM Law will accept payments on legal fees over 4 months after move-in
  • Property taxes and insurance are paid out of the lease payment. It is a true lease, but comes with a 5 year option to purchase at a pre-determined price and pre-determined lease rate for those 5 years.  At the end of the lease, if the client decides not to buy the property, then they get the deposit back and move on.
  • With regard to the purchase price, as mentioned there is a 3.5% annual increase. If the property increases in value by more than that between the time the lease starts and the purchase option is exercised, then the client gets a great deal.  If the property doesn’t appreciate that much and the agreed purchase price is too high, then the client can just walk on the deal.
  • The client is responsible for “minor” repairs and maintenance on the property, but the company uses a property management company that takes care of “major” repairs. There is webpage that lists the items that the company is responsible for and the items that the client fixes themselves.
  • If you want to see some of the houses that they offer, you can go to their website and it shows the asking price and estimated rent, or you can find the house on your own and apply to have it approved.

I think those are the major “deal points.”  For anyone who is interested, I am happy to meet to discuss this lease purchase program in more detail, and to get you referred to my real estate agent friend to get started.  Contact us today.