Lease Option: Option to Purchase

(Today, options to purchase, lease options and lease purchase agreements are three different financing documents. The variances are state specific and not all states have identical laws. Before entering into an agreement with a seller, buyers should obtain the advice of a real estate lawyer. The information below is an overview and is not meant to be construed as legal advice.)

A lease option means you are leasing or renting a property with an option to purchase it sometime in the future. The future price of the property should be fixed at the time the lease-option is signed.

Remembering when the option is signed, it is customarily an up-front payment of some amount to purchase the option. The amount is usually agreed upon between buyer and seller with the up-front payment negotiable. Sometimes the monthly payment can be slightly larger than normal payment with the excess used to purchase the option in the future. In some cases, the option money can be applied toward the down payment for the later purchase of the home.

Lease-options are usually structured in a slow real estate market.

A Lease Purchase allows you to rent and occupy the home while having a contract to purchase the property for a set amount at a predetermined time in the future. There are two documents involved; a lease or rental agreement, and a purchase contract to buy the property at a later date. Lease purchase agreements vary from transaction to transaction, so there is not one universally standard contract.

(A lease Option ((Option to Purchase)) is a lease under which the lessee (the party to whom a lease ((the right to possession)) is given in return for a consideration) has the right to purchase the property. The price and terms of the purchase must be set forth for the option to be valid. The option may run for the length of the lease or only for a portion of the lease period.)

Lease Options are similar in that they often lock in the price of the home at the onset of the contract. However, with many Lease Options you have the right to purchase the property by a certain date, but are not obligated to do so. Most often, options money is non refundable in the event you do not purchase the property.

Benefits of Lease Purchase for the Tenant/Buyer

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.

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 closing costs, 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!

Example:

125,000 Value of home

100,000-loan balance

777.00 PITI payments (your mortgage payments)

Sell under a lease option (2 year option):

125,000 Sales Price

1000.00 Consideration as down payment

1000.00 per month in lease option payments

With a portion of payments to be applied

toward down payment as follows:

1000.00 monthly payment

777.00 PITI payments (your actual payments)

223.00 to be applied toward payments (if option is exercised)

X 24 months

5352.00 applied toward down payment PLUS

1000.00 consideration originally received

6352.00 Total down payment for purchase

Explain to perspective tenants the following when the call you and before you schedule an appointment with them:

1. Rent (lease) is higher then average for the area because the difference between the monthly lease payment and your payments (PITI) will be applied toward the purchase price.

2. Let them know how the option will benefit them and assist them in home ownership with little down now, and monthly payments toward the down payment in the future.

The lease option can be for as long or as short a period as you wish. The shorter the term, however, the more difficult it will be for the lessee to come up with the balance of funds to purchase the property.

Basics of a Lease Option:

Buyer pays the seller option money for the right to later purchase the property.

Buyer and seller may agree to a purchase price now or the buyer may agree to pay market value at the time the option is exercised. It is negotiable.

The term of the option agreement is negotiable, but the common length is generally from one year to three years.

Option money is usually is not refundable.

Nobody else can buy the property during the option period.

The buyer can sell the option to somebody else.

If the buyer does not exercise the option and purchase the property at the end of the option, the option expires.

The buyer is not obligated to buy the property.

Doing a Lease Option / Lease Purchase:

Hire a real estate attorney to draw the option contract and explain your rights, including those of possession and default consequences. The property might be encumbered by underlying loans that contain alienation clauses, giving the lender the right to accelerate the loans upon sale

Sometimes sellers give the option money to their real estate agents as full payment of commissions. Agents are not always involved in the exercise of

Lease purchase agreements and, even if you have retained real estate agent representation, you still need a real estate lawyer. Agents are not lawyers and cannot give legal advice.

In the event of a lease purchase, obtain all the disclosures and do your due diligence just like you would on a regular sale.

This includes and is not limited to:

Obtaining a home inspection.

Request and examine the title policy.

Request an appraisal.

Read seller disclosures.

Consider obtaining pest inspections

Request a roof certification

Obtain a home warranty plan

And hiring other qualified inspectors.

Benefits of Lease Purchase for the Seller:

Sellers generally get market value at today's prices and relief from paying a mortgage on a vacant property.

Although the lease payments may exceed market rent, the buyer is building a down payment and banking that the property will appreciate beyond the agreed upon purchase price.