What is a Lease Option?

And why is it a good thing?

A Lease Option allows you to rent and occupy a home while having an option to purchase the home at a locked in price sometime in the future.  You have the right to purchase the property by a certain date, but are not obligated to do so.  The option money you put down up front is non refundable in the event you do not purchase the property.  There are two documents involved; a lease or rental agreement, and an option contract to buy the property at a later date.  Lease option agreements vary from transaction to transaction, so there is not one universally standard contract.

 

Benefits of Lease Purchase for the Tenant/Buyer

• Minimum cash out of pocket: When you purchase a home the conventional way, you must pay at least 5% down plus closing costs and prepaid fees. When you buy with a Lease 2 Purchase, you only pay first month's rent and a small option deposit.  This will save you between 25% and 85% every time you buy a home.
• A lease purchase gives you time: 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.
• Terrific way to buy a house: For those who are unable or unwilling to immediately commit to a purchase due to bad credit you need time to fix, an uncertain work or relationship situation, lack of a down payment or maybe just wanting to give the house a test drive before signing on the dotted line.
• Faster equity growth: Equity accumulates much faster (five times or more!) than with conventional financing through a bank or lender.
• Rent money is working towards purchase: Every month a portion of your rental payment (typically $100-$500) is credited towards your down payment or off of the sales price.
• Option money is credited towards purchase: When you sign a Lease 2 Purchase contract, you will pay the seller an option deposit.  This money is your vested interest in the home and will be fully (100%) credited to you when you buy the home.
• Frequently no down payment at close: Since you have given the seller an option deposit and you have been receiving monthly rent credits, there will frequently be very little or nothing left to pay for a down payment at closing.
• Profits from appreciation: Since the sales price is locked in before closing (as specified in your agreement), any increase in property value will mean that your equity (what you owe minus what it's worth) is increasing in the home.
• Possible sale for a profit: If you are allowed to sell (assign) your option (it will be in your agreement), you may sell it to a third party for a profit.
• Increased buying power: When you buy a Lease 2 Purchase home, you can put down as little as first month's rent and a $1 option deposit.  Compare that to a typical bank or lender who requires 5-30% down plus closing costs and prepaids.
• Credit problems okay: Qualification restrictions simply do not exist. You will be approved at the sole discretion of the landlord/seller.
• No lengthy escrows or mortgage approvals: Your approval will be based solely at the discretion of the landlord/seller instead of a lender who can take up to a month (or longer) to render a decision.
• Control of the home: You will be put in full legal control of the home for a specified period of time without actually having to 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 dramatically reduced.
• Quick move in time: You can typically take possession of the home in a week or less, instead of conventional move in times of one to three months, after your offer was accepted.
• Maximum leverage: You are spending very little (or zero) money to control a potentially very expensive, and very profitable, piece of real estate.
• Time: Before you actually buy the home, you will have 3-24 months (depending on your agreement) to repair your credit, find the best interest rates, investigate the home and research the neighborhood and/or schools.
• Minimal maintenance: Large maintenance problems or any maintenance problems that exceed a certain amount of money can be delegated to the landlord/seller.
• Privacy: Your name will not be on the deed or in the public records until you exercise your option to buy.
• Peace of mind: You will have full control of the home and can maintain or improve it however you wish.

 

What is the first step? 

Typically, your first step is to meet with us to fill out some basic paperwork.  This paperwork is used to determine what your credit status and the steps that you need to take so that you can purchase your home within 1-2 years.  We will work with you and introduce you to mortgage brokers who are very familiar with what we do and will help you achieve to purchase the home. 

 

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. 

When Can I Move In? 

Many of our 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 a Lease Option to Purchase? 

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.  Even still, the potential loss of this amount is often offset by an increase in home value.  For this reason and others, experts say that lease options generally skew heavily in favor of the renter/buyer.

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 almost always less than the down payment amount required to purchase the property with a  conventional mortgage (20% or so).  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.