Lease with the Option to Buy Homes: How it Works

Understand How You Can Rent to Own a Home

Property for lease

If you are in the process of making a move to a new town but are unsure if you want to buy or lease there may be a middle of the road approach for you to take: That is, "Leasing with an option to buy." Here's what you need to know to understand how lease with the option to buy homes work.

  1. Lease with an option: What is it?  This arrangement means that you are renting a unit with the option to purchase it at a future date.  The price of the property is set when the lease-option is signed by both parties.  A down payment of some amount is typically collected by the lessor for good faith.  Monthly payments will sometimes be higher than the regular rent.  The excess amount can be applied to the purchase price or is considered payment for the "right" or "option" to buy.  If you are living or renting in an area that you think you'd like to live in for a while, consider talking with your landlord about how to start rent to own agreements.
  2. "Assignable" vs. "Non-Assignable."  Assignable lease-options mean that the lessee can offer another person the opportunity to buy the property at the set purchase price.  Smart sellers with put in a "Non-Assignable" clause to ensure that if the market goes up and the lessee is still not in a position to buy the house, that she cannot sell it to a third party for a nice sum.  
  3. Pros for Lessees: Lessees who secure a lease-option in an improving market may find the value of the house they are buying is significantly greater than the purchase price (fixed at the time of the lease to own agreement signing). 
  4. Cons for Lessee:  There is a degree of risk for lessees seeking the lease-option.  People seeking this arrangement typically do so because they cannot qualify for a home loan.  If the portfolio of a person in a lease-option does not improve to the point where she can qualify for a loan when the option to purchase date arrives, she will lose any option money that has been shelled out.  If you are exploring the lease-option arrangement be sure that your credit, savings, debt, and employment stats will be able to get you a loan for the purchase when the time comes.  Just because you have a lease-option does not secure your ability to obtain a loan for the property. The seller will still demand a mortgage commitment.  Another risk for the lessee is a failing market.  If the market sees a decrease, the lessee does not have to purchase the property, however, her option money will be forfeited. 
  5. Pros for Seller. In a soft market, a seller can ensure the sale of her property with the lease option.  If the buyer defaults or simply does not want the property after the term to rent is up, the seller makes away with the option money collected at the start of the term and over the course of higher monthly payments.  An increased monthly payment is also helpful for the cash flow of the seller. This extra money can be used for savings or further investments. 
  6. Cons for Seller.  If the market has seen a rise, the seller can be locked into a deal that provides her with less than market value for her property. Also, if there is a change in family plans, health, or financial status over the course of the term of rent, the seller is subject still, to the terms of the initial agreement; she must give the lessee the right to purchase at the set price if the lessee has been keeping to the bargain and monthly payment schedule.
  7. Availability.  Lease-options are most prevalent in a slow market.  In a hot real estate market, sellers are more apt to cash out to the highest bidder, and not offer the lease-option.   

Now you know how to rent to own a home. Good luck finding lease to own properties near you.

 

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