Often the biggest obstacle
to becoming a homeowner is coming up with enough cash for a down payment. One
way for cash-strapped home buyers to realize their dream is to lease a home
with an option to buy.
Here's how a lease option works. The buyer (called an optionee) leases the
property from the seller (called an optionor) for a period of time. The lease
contract gives the optionee the right to buy the property at the end of the
lease period, or earlier by mutual agreement, at a price agreed upon in the
contract.
The optionee pays a sum, called option money, to the seller at the beginning of
the lease. This money is applied to the purchase price of the home if the
option is exercised. The option money is forfeited to the seller if the
optionee doesn't go through with the purchase. The option money is
non-refundable.
Like any contract, the terms of a lease option are negotiable. The length of
the lease typically can be 12 to 24 months, but anything may be agreed upon.
The amount of the option money, the purchase price and the rent amount per
month may also be up for negotiation. Sometimes a seller will agree to credit a
portion of the rent toward the purchase, providing an additional incentive for
the buyer to go through with the purchase. One thing is certain: during the
lease period, the seller cannot sell the property to another buyer!
Even though the amount of the option money is negotiable, it's usually less
than the down payment amount required to purchase the property following
conventional practices. So for relatively little cash up front, a lease option
allows the buyer to tie up a property at today's prices, and live in it before
making a decision to purchase. If you're buying in a market where home prices
are rising, a lease option might be a wise choice because you set the purchase
price up front.
There are two parts to a lease option agreement. The first deals with the terms
of the lease (rent), and looks like a standard lease agreement. The second
deals with the terms of the purchase and looks like a normal purchase
agreement.
Home buyers who have a house to sell in another location may be able to lease
option a home to give them a place to live and time to sell their home. Then
they are able to use their equity from the sale to purchase the home they are
renting at an agreed price.
NOTE: Since you forfeit your option money if you don't go through with the
purchase, don't option a property that you have no intention of buying
Main
Advantages
-Minimum cash may be
required up front. Sometimes buyers with credit problems will benefit from this
purchase method, since sellers may finance you, OR the method affords you time to
repair less-than-stellar credit before you purchase, using a mortgage loan you
acquire yourself.
-Your home buying power is increased, as you now have the ability
to purchase using alternative methods (Lease Purchase or Lease Option).
-You have faster equity growth than if you were just renting, and
faster than with conventional financing. Some of your rental or option money is
working for you towards the purchase. You may have a lower down payment at closing
since you will have option money or rental credits to apply. By the time you
purchase, prices may have appreciated beyond your locked-in price, giving you
additional equity when you eventually sell.
What is the first step?
-A lease purchase gives you sufficient time to check out all the
features and faults of the house. Also, you have time to check out the
neighborhood, schools, churches, temples, synagogues, nearby shopping, health
care facilities, recreation, and your next door neighbor before you buy the
house.
-With a lease purchase, you skip paying traditional down payment
and other fees normally found in a purchase using conventional mortgages.
-While you are leasing, you have no taxes or
property insurance to pay (the owner does that). Major repairs are normally the
owner's responsibility until you buy the house, at which time YOU become the
owner!
-When it comes time to purchase, many mortgage lenders have programs that let
you refinance to buy your home. This means that your down payment and rent
credits from your lease can apply as your down payment when you purchase! Most
lenders require 12 consecutive monthly rent payments, in good standing.
-Every type of home is available for lease purchase in all price ranges and
locations.
When Can I Move In?
Many lease to own homes are
vacant and available now! Once you are approved, you may be in your home within
3-5 days.
WHAT IS THE DIFFERENCE BETWEEN A LEASE-PURCHASE AND A LEASE-OPTION AGREEMENT
Lease Purchase Agreements
A Lease Purchase Agreement is usually two
separate agreements between the parties: a Lease Agreement and a Purchase
Agreement. The Lease Agreement is a fairly standard rental agreement. The Lease
Purchase Agreement is a purchase/sale agreement whereas the tenant/buyer is
contracting to purchase the house for a specified price and term. The Lease
Purchase shows a definite intent to purchase the property, and sets the terms
upon which the sale of the property will occur. This differs from a Lease
Option where the tenant/buyer has the right but not obligation to
purchase the property.
The value of the home may increase if the Lease Purchase Agreement has a term
of many months or years, but the price and other terms are fixed in the
purchase agreement. The seller cannot sell the house to anyone else as long as
the Lease Purchase Agreement is in force.
The Purchase Agreement should contain all the terms normally found in a
Purchase Agreement, including such issues as closing costs, buyer's inspection
rights, what the seller's disclosure obligations will be, what personal
property will be included or excluded from the sale, and what will happen in
the event either party does not comply with the contract.
There is no standard lease purchase agreement, so read over the entire
agreement and know who you are dealing with. If in doubt, run any forms by your
lawyer prior to signing.
Lease Option Agreements
A Lease Option agreement is
usually two separate agreements between the parties: a Lease and an
Option
Agreement. The Lease Agreement is a fairly standard rental agreement.
The
Option Agreement is a purchase/sale agreement whereas the tenant/buyer
has the
exclusive right to purchase the house for a specified price and term.
The price
of the home may increase if the Option Agreement has a term of many
months or
years. The seller cannot sell the house to anyone else as long as the
Option
Agreement is present.
The
tenant/buyer leases the house for a specific
monthly rent and term. Part of the rent may or may not be applied to the
purchase price. The Earnest Money Deposit (also called an option fee),
price
and terms of the sale are negotiated in the Option Agreement.
The Lease Agreement usually has a default clause. If the tenant/buyer
does not
pay the rent as agreed in the Lease Agreement, the Option Agreement is
null and
void, and the Earnest Money Deposit is forfeited by the tenant/buyer.
Lease Option arrangements work very well for buyers needing to improve
their
credit. The tenant/buyer can find a home they wish to purchase, move in,
enroll
their children in school and enjoy the home while rebuilding their
credit. The
on-time rental payments will help build the tenant/buyer's credit
rating.
Coaching and mentoring the tenant/buyer on methods to improve their
credit is
of great benefit to the Tenant/buyer, and helps to prepare for the
responsibilities of home ownership.
Many lenders consider the execution of the Option Agreement as a
refinance loan
instead of a purchase loan. A refinance loan usually has more liberal
underwriting criterion than a purchase loan. Therefore, refinance loans
are
easier to qualify. Also, increased equity may be considered in the loan
to
value calculation.
Some lenders recommend that sellers lease option a home to a
tenant/buyer
before carrying a mortgage for the buyer. This way the seller will have a
payment history with the buyer, and proof of the buyer's ability to
handle
financial responsibility. Foreclosure of a mortgage is a much more
difficult
and lengthy process than an eviction on a lease agreement.
Owner Financing?
Owner financing, simply
stated, is a seller willing to help a buyer by financing part or all of the
purchase price. Usually, the buyer makes a down payment and the seller will
carry a first mortgage, second mortgage or Vendor Terms Contract.
