What is Lease Option?
A lease option is a combination real estate rental, sales and finance technique. It is a property lease for a fixed time period with an option for the lessee to buy the property at an agreed option price before the lease term ends. Buyers like lease options because little up-front cash is required. Sellers also like lease-options because they provide necessary cash flow to pay the mortgage and property taxes from a tenant who has a vested interest in treating the property well and who is likely to buy it.
What is a Rent to Own Home?
A rent to own home is where you lease a home, but you also control the property by having the option to purchase it at any time during your lease period. The owner can not market the home for sale, since he/she is bound by their agreement to sell the home to you at a pre-determined price that you agree on before you move in. The lease option has a fixed period after which it expires. The term is typically one to two years and is negotiated between you and the owner. To secure the rent to own option, a down payment is necessary. This is known as “Option Consideration”. This consideration is compensation to the owner for taking the property off the market and to guarantee a future price to you. The rent to own option consideration will be applied as a reduction to the purchase price at the time you decide to buy. It can also be counted as a down payment instead in order to help you qualify for a loan.
If you decide not to purchase the property, the rent to own option consideration is not refunded. It is kept as compensation by the owner for guaranteeing the price to you for a fixed period of time. Your intent should therefore always be to buy the home once you enter into a rent to own agreement. The option consideration is typically 1% to 5% of the agreed upon purchase price and is negotiated up front.
You should always ask for a rent credit. This is beneficial for both the Seller and the Tenant/Buyer. You agree to pay slightly higher than market rent, in exchange for receiving a percentage credit to the purchase price for every rent payment made on time. Eg. Let’s say market rent for a specific home is $1,200. You agree to pay $1,400 a month in rent, but in return you receive a $400 a month rent credit if you paid on time. If you leased the rent to own home for one year, you would have accumulated $400*12 = $4,800 in rent credits, which will reduce your purchase price even further. In other words, a portion of your rent is saved towards the purchase of your rent to own home instead of losing the entire amount to the landlord.
Why would I want to Rent to Own a Home?
There are many benefits, and a few downsides. Good reasons for deciding on a rent to home are:
*You can’t qualify for a mortgage right now, but you don’t want to throw money away on rent either. You may need some time to fix a few credit blemishes but don’t want to put off your decision to buy while you work on your credit. You can qualify to buy a home right now, but need to put down a large down payment because the loan program requires it, and
you don’t have it right now.
*You are buying a multi-million dollar home and got a good price on it. The mortgage company tells you that you need to put down at least 25% because of the high loan amount, and you don’t want to. Because you know that after one year in a lease to own arrangement the transaction could be treated as a refinance using the appraised value of the home, you put 5% down now, lease for a year, then refinance. The net result is you just bought yourself a multi million dollar home with only 5% down. Pretty neat.
*You’re relocating out of state to a new city. You can’t get a mortgage because you don’t have a job in the new city yet, but you know you can get a job pretty easily. Moving into a rent to own home allows you to get the home you want right now, and then you can always buy it once you have received your first pay check.
What if I have less then perfect credit?
Don’t worry, rent to own programs were uniquely designed with your situation in mind. Sellers of rent to own homes will expect you to have bumpy credit and they are specifically marketing to you. Qualification for a rent to own home ownership program is based more on your ability to make the monthly payments and to put down a reasonable down payment than it is on your credit. The reason for the lease term before the final purchase is to allow you time to Repair Your Credit, yet stay in the home you want while your score is improving.
How much would I need to put down?
A lease option is a combination real estate rental, sales and finance technique. It is a property lease for a fixed time period with an option for the lessee to buy the property at an agreed option price before the lease term ends.
Buyers like lease options because little up-front cash is required. Sellers also like lease-options because they provide necessary cash flow to pay the mortgage and property taxes from a tenant who has a vested interest in treating the property well and who is likely to buy it.
What are the benefits to me?
Without a doubt, the Lease 2 Purchase contract is the quickest, easiest and least expensive way to buy, sell and invest in real estate. It replaces the typical adversarial relationship that usually exists between buyers and sellers with a win-win method of transferring real estate ownership. As a result, it is highly prized by those who know about its powerful features and benefits.
Specifically (if you’re the buyer), you will have minimum cash out of pocket, credit problems are okay, faster equity growth, increased buying power, time to kick the tires and peace of mind.Specifically (if you’re the seller), you will have a top sales price — even if demand is low, positive cash flow, the largest market of buyers, minimum risk, no Realtor commissions, no maintenance, noland lording and (my favorite) a non-refundable option deposit.
What are the shortcomings?
There are only a few minor drawbacks, but you should be aware of them, nonetheless. The first (if you are the landlord/seller) is an “equitable title” claim by your tenant/buyer. Any good Lease 2 Purchase course will teach you how to minimize your risk regarding this claim.
The second (if you are the tenant/buyer) is protecting your option. What if your landlord/seller disappears, dies, or decides they don’t want to sell? Again, any good Lease 2 Purchase course will teach you how to protect your option.
The third is the infamous Due-On-Sale Clause.
The Due-On-Sale clause is a non-issue. Here’s why…
There isn’t a single lender on the face of the earth that is going to enforce their Due-On-Sale rights on a mortgage that is performing (being paid on time). Why? Because lenders are in business to make money. If they enforce their DOS clause, they are essentially taking back possession of a property in order to sell it, more than likely for a huge loss.
Furthermore, lenders will only enforce their DOS clause for one reason, the payments are late. And guess what? If the payments are late, the bank is going to foreclose, not enforce their DOS clause.
And remember, there is no Due-On-Sale jail.
What is the difference between a Lease 2 Purchase, a lease option and a rent-to-own?
The truth is, there is absolutely no difference between a Lease 2 Purchase, a Lease Option or a rent-to own. A few people say there is, but they are wrong. Here’s why. When an experienced real estate professional talks about a Lease 2 Purchase, a lease option or a rent-to-own agreement, they are really talking about an arrangement that contains both a lease contract and an option to purchase contract. By definition, this is really a Lease 2 Purchase (or lease option or rent-to-own). Thus…
Lease + Option to Purchase = Lease 2 Purchase AND lease option AND rent-to-own
They’re all exactly the same! Don’t let anyone tell you otherwise.