This will provide you with a basic understanding of why and how a lease-with-option-to-buy (one of the two methods previously described to purchase goods or equipment with a high selling price) can be a great way to buy and sell a model whose price is normally far beyond the means of the average person!
Let's begin by breaking down the term 'lease-option'. Although the term is used as if it were one contract, it is essentially two entirely separate agreements within one contract.
1. We have all heard of leasing or renting. If you don't currently own your home, then you probably signed a rental or lease agreement for the house, condo or apartment where you live, or have entered into an agreement like that in the past.
2. The option is the guaranteed choice of purchasing the subject of the agreement --- in this case, the locomotive or Mega-Trolley---at a future date based on a price you and the seller had previously agreed upon, under the terms that you had previously set in the beginning.
When you buy a house, you need to come up with a large down payment, complete credit & financial forms, assume closing costs, paid "points", fees, etc. It can be overwhelming! In that regard, a lease-option benefits both parties involved.
The theory behind a lease-with-option-to-buy is simple: Lease a locomotive or expensive trolley model with the opportunity but not necessarily the obligation to buy . The other relevant, and related, method --- easily confused with that --- is the rent-to-own agreement.
Both agreements have benefits for both the Buyer and the Seller, which are outlined below.
Benefits for the Buyer:
• A Low down payment places the model in your hands
• A portion of the monthly lease payment is used to reduce principal owed on the locomotive or tram
• No credit check (usually or necessarily).
• Payments are usually lower than borrowing money from a bank or putting the transaction on your credit card
• The model may appreciate in value, but the price is already set in the agreement.
• There are no additional costs or fees.
• By the time you exercise the option, you can obtain a personal loan and purchase the model outright, and you will have done so with no money down and no financial qualifying.
Benefits for the Seller:
• No Broker commissions.
• No closing costs or additional fees.
• Monthly rental revenue.
• No worries about storing or maintaining the model.
• Perhaps no tax consequences (check with your CPA on this)
• Option payments and down payments are non-refundable.
• And, best of all, the Seller has the ability to sell an object which is only optionally needed (no one needs a model) at a high selling price. Risk is minimal and the huge customer base is far beyond what you had previously envisioned.
For both Buyers and Sellers to be successful with rent-to-own or lease-option agreements, a few things need to happen:
• Buyers and Sellers need to get connected.
• Both Buyer and Seller must agree on the terms of an agreement that benefit both sides.
• Both Buyer and Seller must sign a binding agreement.
• In the case of a Lease-Option agreement, the Buyer must execute the option before the expiration date.
The key points of any lease option agreement are:
• The amount of the down payment and option price.
• The length of the lease/option term.
• The selling price.
• The amount (or percentage of the rent) that will be used to reduce the outstanding principal (the amount still owed).
• Who has the responsibility and the authority to upgrade, modify, or maintain the model.
Down payments on a lease-option can vary tremendously. Remember, higher is not better. The goal of this transaction is to Encourage and Enable the Buyer to finally buy and operate the locomotive or mega-trolley of his dreams.
All these terms are classically negotiable. If you are not good at this barter-and-trade business, you might want to enlist the aid of a friend who is skilled at this, or even a hard-nosed gimlet-eyed businessman or attorney to actually perform the hard bargaining for you.
The most common practice is to pay a down payment which does not cripple the Buyer, but acts as a very strong motivation not to disappear during the period of the Agreement. Possibly, a similar payment is made at each anniversary of the Agreement afterward. All of these payments goes toward reducing the principal, and, in most cases, is non-refundable (But remember, everything in the Agreement is negotiable !) . Generally, this down payment negates the need for a security deposit.
This is the kicker of the lease option - The Buyer has the opportunity to accumulate the equivalent of a down payment over the course of the lease. The Seller keeps the money if the Buyer defaults on the lease, or fails to exercise the option, and gets the locomotive or traction.
The most typical and beneficial length of lease-with-option is four years. A shorter period does not allow a reasonable equity to accrue from the payments made during the Agreement. This is important because the more equity the Buyer owns in a model, the greater the pride of ownership, and the less the chance that he will need more money down or qualifying restrictions when he finally pays the balance off.
Typically, a Rent-to-Own agreement obligates the Buyer to go through with the transaction, although even here, the Buyer keeps the payments already made.
The selling price must benefit both the Buyer and the Seller. For the Seller, he must consider the future value against the costs incurred if the locomotive or model were to be sold by a broker or auction house. Remember, auction houses traditionally charge the Buyer on the order of 20% of the final selling price as a fee for selling an object, AND --- recently --- a 12% fee has been charged to the Buyer, in addition. These costs must be taken into account when the total cost of the transaction is calculated.
The Buyer must understand that price negotiations are not usual in lease-option agreements. This is where a lease option is appealing to the Seller. As the Buyer, you are able to agree on a higher sale price, counting on paying off much of the principal of the Agreement in the coming years. For the Seller, this is appealing because they it is highly unlikely that they could sell at the top dollar price for cash in this economy.
Deciding on what percentage of lease payments reduces the principal is tricky. The range can spread between 10% to 100%. This is the second area of negotiation after the selling price. Now the Buyer can always pay additional monies, above and beyond the lease payment, for which 100% would come off of principal. One common practice is to allocate 50% of the lease payment to reduce principal or act as added down payment.
The difference between a lease-option and a rent-to-ownl agreement is very evident with maintenance issues. The lease-option requires the buyer to assume more responsibility when it comes to repairs and maintenance. But once again, both parties must come together and agree on limits. Generally, the Buyer is responsible for all repairs and maintenance for the duration of the lease.
Upgrades and improvements are quite common in lease option agreements. Everyone benefits when the Buyer invests in upgrading (increasing value) the home he is leasing. The home's value can only increase. Handling improvements should be agreed upon. Normal limitations include advance notice and, if a do-it-yourself project, evaluate the skill level required for competent results.
The best lease-option deals occur when both parties are happy. It is very important to have a proper agreement set and ready to go.
It is also advisable, although not mandatory, to have an attorney prepare the Agreement that ssets all this in motion. Most praticing attorneys have a file on their permanent hard disc that they can access and print with minimal effort. There may also be copies of different model agreements available on-line to you, the modeler. Always wanted that $75,000 live steam locomotive you saw advertised on Discover Live Steam ? This might be the pathway to fulfill that dream. We also want this seen as an effective but rarely-utilized marketing tool for manufacturers and advanced modelers to facilitate the sale of their products --- just like in the automobile business. Good Luck ! ERRORS AND OMISSIONS EXCEPTED ; Save those important questions for your Attorney . We do not pretend to do more than stimulate the hobby and facilitate the fulfillment of dreams, not to give legal advice or guidance .
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