What is a Lease Option?
A renter signs a lease with an option to purchase a property for a specific
price within a certain time frame, that is called a lease option. In most lease-option situations, a portion of the rent is
applied to a future down payment.
Lease options are most popular among buyers:
- Who don't have enough funds for a down payment and closing cost.
- Who need to move quickly with time on their side to buy at a later date.
- Who need extra time to wrap up personal affairs or fix credit.
- Who are tired of paying rent to landlords for nothing in return.
- Who likes to be in control of the option contract and either buy or not buy.
How
do Lease Options work?
A
lease option is an arrangement with you and a seller to exercise the option to buy a home after you have rented it for a specific
period. A portion of your rent and the option fee would be applied toward the purchase if the option is exercised. This is
referred to as rent credit, which most institutional lenders will accept as part of the down payment if rental payments exceed
the market rent and if a valid lease-purchase agreement is in effect, a copy of which must be attached to the loan application.
A lease option is
not the same as a regular purchase contract, which is a bilateral agreement. A bilateral contract legally binds both parties
to the agreement, whereas an option only binds the seller. The rentor is not bound to buy; it is his option do so
(or not to do so).
What
are the benefits of a Lease Option?
If
you are a tenant/buyer, you are probally aware of the advantages of owning a home tax shelter, appreciation,
security, etc. If you seek to lease purchase a home, you typically cannot purchase a home through conventional means, are
not ready to commit yet, are very smart, or a combination of the above.
The lease purchase contract
provides you with many features and benefits, but perhaps the most powerful one is the rate at which you accumulate equity.
Compare any lender's loan amortization schedule to that of a lease purchase contract and you'll quickly see that the lease
purchase contract wins hands-down. Moreover, the buying power of a lease purchase contract can quickly and easily land you
a home that you never thought you could afford. Here are some of the tenant/buyer's features and benefits:
- Faster Equity Growth
Equity can accumulate much faster than
with conventional financing.
- Rent Money is Working Towards the Purchase of the Home
Each month that
you pay rent, a portion of that payment will be credited towards your down payment or off of the sales price.
- Option Consideration Is Credited Towards the Purchase of the Home
When
you execute (sign) a lease purchase contract, you must pay the landlord/seller an option deposit. This money is your vested
interest in the home and will be fully credited (100%) to either your down payment or off the sales price.
- Minimum Cash Out of Pocket
When you purchase a home conventionally,
you must pay closing costs, prepaids and a down payment. With a lease purchase contract, you pay only first month's rent and
an option deposit. This will save you between 25% and 85%.
- Frequently No Down Payment at Closing
Since you have given the landlord/seller
an option deposit, and you have been receiving monthly rent credits, there will frequently be very little additional money
needed to come up with for a down payment at closing.
- Closing Costs Are Delayed
Your closing costs will be delayed (not avoided)
until you and your landlord/seller actually close on the home.
- Sales Price Is Locked In
The sales price will be stated in the lease
purchase agreement.
- Profits from Appreciation
Since the sales price is locked in before
closing, any increase in property value will mean that your equity is increasing in the home.
- Buying Power
Your buying power is drastically increased. You can get
into a lease purchase home for as little as first month's rent and a $1 option deposit. Compare that to a lender who requires
5-20% down plus closing costs and prepaids.
- Credit Problems Will Not Hold You Back
Qualification restrictions are
not as strict as conventional financing. You will be approved at the sole discretion of the landlord/seller.
- Control of the Home
You will be put in legal control of the home for
a specified period without having to actually own it.
- No Taxes, Less Liability
Since you do not own the home yet, you will
not have to pay property taxes and your liability exposure will be drastically reduced.
- Maximum Leverage
You are spending very little money to control a very
expensive and potentially very profitable investment.
- Time
Before you actually buy the home, you will have time to repair
your credit, find the best financing available, investigate the home and research the neighborhood.
- Quick Move In Time
Move in time is typically less than one week compared
to conventional move in times of one to three months from the time the offer was made.
- No Lengthy Escrows or Mortgage Approvals
The decision to lease purchase
to you will be made at the sole discretion of a landlord/seller rather than by a lender who can take up to a month (or longer)
to render a decision.
- Minimal Maintenance
Large maintenance problems or any maintenance problems
that exceed a certain amount of money are delegated to the landlord/seller.
- Privacy
Since you are leasing, there will be no public record of where
you live.
- Peace of Mind
As long as you live up to your end of the bargain, you
will have full control of the home and can maintain it or improve it as you wish (major improvements will require the permission
of the landlord/seller). |
