Bruce & Pam Wachter, REALTORS
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A Discussion of Lease Purchase Options
Many potential real estate buyers contact us an inquire about any lease-purchase options available. Many are under the impression that lease-purchase may be an easier way to buy a home. This can be true dependent on a buyer’s financial ability to abide by terms and conditions (which may include an even more stringent credit check than typical), and a much higher monthly payment than typical. It’s important to understand what a lease-purchase is.
A real estate purchase option gives someone the right to purchase a piece of property at a fixed price during the term that the real estate purchase option is in effect. The terms are memorialized in a legal document. During the option period under the terms of this document, the owner can not sell the property to anyone else and must sell the property to the purchaser of the option if the purchaser desires the property. The purchaser has the right, but not the obligation, to purchase the property. The purchaser can let the option expire without purchasing the property. The only lose, in this case, would be the price paid for the real estate purchase option.
A valuable tool for cash-poor, but income-rich households, lease-purchase options traditionally allow you to rent a home for some preset period of time with a portion of the rental payment going toward the down payment to help purchase the rented property.
Traditional options typically included a potential buyer (the lessee), who paid the rent to the home owner (the lessor), who wanted to sell the home. Some or a portion of the rent and sometimes an option fee was held to accumulate the down payment. At the end of the contract, usually for shorter terms of six to 12 months, but determined by the parties, the buyer-lessee had the option to use the down payment toward the purchase of the home for a sales price amount agreed upon at the conception of the contract.
Lease-purchase options are often a better deal for the lessor-seller, particularly one who had already moved out and left the property empty. During the contract, the lessor-seller has rental income which helps stop any equity drain. If the lessee-buyer opted to buy, the lessor-seller is successful. If the lessee-buyer does not exercise the option (80 percent of the time statistically) the lessor-seller keeps the option money and all the rent.
If the lessee-buyer does not qualify for a loan at the end of the contract, he or she will lose all monies paid into the option. Keeping up with lease-option payments may also be difficult as a lease-option's monthly payment is generally higher than the going rents for identical rental properties. This is because the lease option payment has to cover both the rent of the property, down payment savings and maybe an even an option fee.
There are, at the very least, three things you must determine at the time that the option is created for the property.
1. How much will you pay for the property if you decide to purchase it? It does not matter if the value of the property goes up or down during the option term, you will be able to purchase the property for the price agreed upon in the option. If the value goes up, you win, but if the value goes down, you should let the option expire and just purchase it for the going value at the time, unless the contract prohibits you from doing this. If you let the option expire, your maximum loss is the amount you paid the owner for the real estate purchase option.
2. How long is the term of the option? The term is a fixed amount of time and depends on what you and the owner will agreed upon. Most option contracts have a one or two year term but it can be any amount of time that you agree.
3. How much are you willing to pay for the option? You must purchase the option from the owner of the property. This money belongs to the owner no matter if you decide to purchase the property or let the option expire. These monies may be combined in a monthly payment, or may be one lump sum for the option, and a monthly rental payment.
To prevent the owner from selling the property while the option is in effect, you can record the real estate purchase option with the county courthouse. However, you may want to consider the consequences of this action as some mortgage companies will call the loan due if they see a purchase option for the property as they consider it a sale. You should use your judgment for this.
This article is provided for general informational purposes only, deemed reliable, but not applicable to all personal situations. However, you should check with your financial advisor or your attorney before entering into any lease-purchase arrangement.