What exactly is a lease option or rent to own property? Simply put, it is leasing a property with the option to purchase this property in the future. The price of the property is decided at the time the lease-option agreement is signed by both parties. Most often the monthly payments are slightly higher than the going rent and sometimes the lessee will provide a down payment to show good faith. The excess monthly payment amount will be set aside by the lessor and will be credited toward your future down payment. For example, if the owner’s expected market rent were $1,500 per month, he or she might increase that to $1,800 per month and apply $300 per month to your down payment. After one year, you would have a down payment credit of $3,600.
Pros for Lessees: Lessees who enter in to a lease-option in an improving market may find the value of the house they are buying is significantly greater than the purchase price (remember we fixed the price at the time of the lease signing).
Cons for Lessee: There is a degree of risk for lessees seeking the lease-option. People seeking this arrangement usually do so because they cannot qualify for a home loan. If your financial conditions do not improve to the point where you can qualify for a loan when the option to purchase date arrives, you will lose any option money that has been shelled out.
“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 he/she cannot sell it to a third party for a nice sum.
It is imperative that you formalize your lease- option with a written contract. All details must be specified ie the amount of rent to be credited towards down payment, sales price, expiration of the option and any contingencies there may be, just to name a few.
The owner remains responsible for property taxes, insurance, and sometimes even repairs to the property during the lease-option term. Likewise, it is the owner, who would suffer a loss if the property were damaged or destroyed during your lease-option term. It is always a good idea to purchase separate renter’s insurance to cover your own personal belongings.
If you elect not to exercise the option to purchase the home, your credited rent usually is forfeited to the owner. It is considered compensation to the owner for the option. Some reasons why you may decide not to exercise an option include lower property values in the area, an inability to obtain a mortgage, a job transfer or the like.
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Are you seeing any owners willing to “subsidize” that DP by allowing a credit off a market rent? It seems that rather than give a discount on the home purchase, one could just pay a market price, but the land lord could give a purchase “discount” in the form of allowing $500/mo to go to rent, or $6,000 as a DP at the end of one year, if they exercise the option.
This way it is a true option, and i think most renters would find it much more appealing as long as they weren’t overpaying.
Thank you for putting this process in such easy to understand terms!! There are a lot of misconceptions about this out there about this process & it is always important to have a real estate attorney help with these types of transactions.
Great post on understanding the basics of a Lease Option! A Lease Option can be great for both the buyer and seller — especially in this market. However, as you stated, the buyer is at great risk if they do not quickly attack whatever issue is preventing them from qualifying today! (i.e. credit or ability to veryify income) Given the current credit market, we find that most people need a 24 month lease term.
You hit the nail on the head. In Texas we cant do alot of this anymore. We have alot of buyer looking for it also.