There’s a million reasons not to buy a house, but this one is not a good one. So you’re saying…
“I just resigned my #lease for another year, I need to wait to buy real estate.”
No, you don’t.
Not with the right plan. This is an easy fix as long as you understand the terms of your lease and the realtor you're working with knows how to structure the offer (like me!). Every lease has a penalty for breaking it early, of course, otherwise a landlord would never have any security in signing a tenant. The trick is to make the Seller pay for it as part of the transaction.
All leases are different, but most include first and last month’s rent or something close to it. This fee can be written into the real estate offer contract (and very well hidden if your realtor is good). From there the Seller assumes the risk, which is why it's not as strong of an offer for the Seller as a cleaner offer that doesn't contain hidden fees.
The only risk to you as the Buyer when making this kind of offer is the actual offer itself. You’ll lose every time in a competitive situation unless you offer some benefits for taking on the risk. Sometimes offering above the asking price is enough to have the Seller take your offer over a cleaner one that is right at the asking price.
The perfect target for this strategy is a property that’s been sitting on the market for a long time or a property that doesn't have any offers on it currently, you have a lot of opportunity to make it happen.
In essence, you're “financing” your lease buyout by adding that fee to your offer price. In most cases, you'll increase your final monthly mortgage payment by about +$15/month in order to do it... not too bad!
***The important thing to take away is that you should NOT wait, especially in an appreciating market. If you decide to wait until next year, prices could go up by $50,000 and you didn’t buy real estate because of the $5,000 fee you’d spend on breaking your lease. So buying the same property a year from now would cost you +$146/month instead of +$15/month.***
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Here’s more math if you’re interested and analytical like me:
Let’s call it $3,500/month in rent for a nice expensive 2 bed / 2 bath in the Highlands of Colorado. So you’re at risk of losing your last month’s rent of $3,500 by buying a house. Some leases have a collection for months remaining on the lease, as well. Say $500 per number of months to lease termination. So you’re at 11 months and that’s another $$5,500 for a total of $9,000 to break your lease.
Ouch!!
It’s still possible to get a deal together if you find the right home. If you make an offer and write in a credit of $9,000 for “lease buyout”, the deal could come together with the right negotiating tactics. $9,000 is an extreme case. $3,500 or $5,000 just happens to be a much more likely number.
A home priced at $850,000 may be over-priced by $10,000 anyway, and it’s perfect for you because you need that $9k to buy out your lease. You’d essentially be making an $841,000 offer to the Seller, but it would look like $850,000 to the mortgage company. If the property appraises at $850,000, then everyone wins. If the property only appraises at $840,000… then there’s a problem. That’s the seller’s problem, and they can decide whether to continue with the deal or not.
From the Seller's point of view, that $850,000 offer becomes an $831,000 offer because he has to drop the purchase price from $850,000 to $840,000, and then give you the $9,000 credit for your lease buyout. It’s still a win for you as the Buyer if the Seller accepts, but there is a chance the Seller doesn’t go for it because he wants to get the full $850,000 and gets greedy. It all depends on the Seller's reason for selling the property.
That’s the only place where you stand to lose as the Buyer! --- and even then, you'll get all your earnest money back and just move on to the next property.
So overall, don’t let your lease be the reason you don’t buy a house. There are ways around it that your realtor can educate you about and help you with when it comes to structuring a deal. Above all else, choose a realtor you TRUST! They will be more valuable to you than any amount of rumors and advice from your non-real-estate-professional friends and family.
Now let's get out there and find you something!
-Derek Chisholm
720.446.8559
DChisholm@LIVSIR.com
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