The Case for “Lease-Options” (Prospective Tenants/Buyers)

The current crisis in our real estate market has made the Prospective Buyer have to be more creative and resourceful in trying to find ways to accomplish their goals of home ownership. The current market hasn’t changed the desire for most people to own a home, it has just made it more challenging to accomplish.

The lending requirements have tightened, the down payment requirements have increased and good credit has become a must. Most people are keenly aware of the advantages that home ownership provides: tax savings, property appreciation, financial and personal security, etc. However, more and more people are having the door of homeownership shut because of the current economic climate and a “Lease Option” or “Lease-Purchase” contract is a tremendous vehicle to help many families re-open this door and walk through it down the path towards homeownership.

 

What is a Lease-Option or Lease-Purchase?

A Lease-Option agreement, also called a Lease-Purchase, is a lease combined with an option to purchase a property within a specified period or at the end of their lease, usually 3 years or less, at a pre-negotiated sales price. Lease-Options allow a Tenant/Buyer to pay their lease monthly, with a portion of their lease payment (lease premium) being applied towards the purchase price when they are ready to buy the property. The prospective Tenant/Buyer pays an up-front option fee, generally 1.5% to 3% of the purchase price, which is credited to the purchase price. If the purchase option is not exercised, the buyer loses both the option fee and the lease premium.

 

Tenant/Buyer Features & Benefits

Here are some features and benefits for a Prospective Tenant/Buyer:

  • A Portion of the Lease Payment Goes Towards Purchase: Every month a portion of your lease payment (typically $200-$300) is credited towards your down payment or off of the sales price. Depending on the contract, some options include the matching feature by the Seller.
  • Up-Front Option Money is Credited Towards Purchase: When you sign a Lease-Option contract, you will pay the seller a non-refundable option deposit. This money is your vested interest towards the purchase of the home and will be fully credited to you when you buy the home.
  • Minimum Cash Downpayment: When you purchase a home the conventional way, you generally put at least 5-30% down (depending on purchase price) plus closing costs and prepaid fees. When you buy with Lease Option contract, you only pay first month's rent and an Option Deposit (generally 1.5%-3% of the agreed to purchase price).
  • 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.
  • Manageable Solution for Past Credit Problems: Qualification restrictions simply do not exist. You will be approved at the sole discretion of the landlord/seller. Because you will have 12-24 months (depending on your agreement) to exercise the Purchase Option on the Agreement, this will allow you the time you may need to repair your credit so you can qualify for a traditional mortgage, find the best interest rates, investigate the home and research the neighborhood and/or schools.
  • Frequently Little or No Down Payment at Future Closing: 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.
  • Potential Profits with Future Appreciation: Sales Price is fixed in before closing (as specified in your agreement), and any increase in property value will mean that your equity value is increasing in the home.
  • Increased Buying Power: When you purchase a home with a Lease Option, you can put down as little as first month's rent and the up-front option deposit. Compare that to a typical Bank or Lender guidelines that typically require 5-30% down plus closing costs and prepaid items.