Lease Option?... Is it RIGHT for YOU!!
Everything you need to know about “Lease Purchase” but were afraid to ask!
The Lease Option or Lease with Option to Purchase Real estate is making a comeback in the market place. Originally designed to allow first time home buyers the opportunity to lease then buy a single family residence, the Lease Option has evolved into a highly sophisticated tool for not only first time home buyers but investors as well.
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Many people think that “Lease Purchase” is their only option because of dings on their credit or other challenges. There are many mortgage programs including FHA and VA that provide options for home ownership with a conventional mortgage at a decent rate for low income families, Veterans and people who have had less than perfect credit. Before you give up on yourself call us at 1-800-259-9334 and find out if there is a better way.
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In it simplest terms the Lease Option is:
- A lease on a single family residence, condo, investment property and or any type of real estate. The option is your right to purchase the property at a set price.
- That lease should include the following:
- The lease must be for a specific length of time (just like your apartment lease)
- The lease must state the amount you are leasing the property for on a monthly basis.
- The lease must state the amount of deposit you are putting down on the property. The amount can vary and can be subject to state and local laws.
- A start date and a final date
- It spells what is required of the Buyer (Lessee) and the Seller (Lessor), such as:
- who pays the utilities
- who is responsible for the real estate taxes
- who should carry the insurance on the dwelling
- who cuts the grass and takes out the garbage
- The lease should specify what monthly credit will be given to the purchase price when and if the option is exercised.
- Attached to the lease or incorporated into the lease will be the Option Agreement. The Option Agreement will spell out the terms of the sale just like a real estate sales contract. The Option agreement will include the following:
- Purchase price of the property
- When the option needs to be exercised
- What happens in the event of a default by either the Buyer and or Seller
- What credits if any will be allowed from the lease
- How the purchase price will account for the deposits and credits.
Example: Mr. Wilson is offered a single family residence under the following terms and conditions:
- He can Lease the property for $1,500 per month, this amount includes on taxes and insurance. Mr. Wilson has to pay all of the utilities as well as the upkeep on the interior and exterior of the building.
- Mr. Wilson will be given a Lease Option To Purchase the property for $100,000. He will have 24 months to exercise his option, and during that period of time he is required to purchase and repay the balance owed on the contract to purchase.
- The Seller (Lessor) of the property will credit $200.00 per month to the purchase of the property as long as the payments are made on time. In addition, the Seller (Lessor) is asking for a down payment/deposit of $5,000 which is
non-refundable and will be applied to the purchase price if the option is exercised.
Thus the buyer can lease the home for $1,500 per month. He must come up with $5,000 to put down on the property before he can take possession. Anytime during the 24 month period he can purchase the property by paying off the Seller what is owed. Assuming the seller waits 24 months he will owe the following:
Credit Deposit $5,000
Credit 24 Months @$200 $4,800
Balance owed to Seller $90,200
Things that may still need to be considered are tax pro-rations, transfer fees and misc. other items.
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Lease Purchase might seem like a good option to people who will only live in a home for a few years. Workers who get transferred frequently often think a leased or rented property is a good option but a better option might be to buy a home with a low adjustable rate mortgage and sell it when they make their next move. In some areas where property appreciates rapidly you may even make a profit..
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The above was a simple example of a Lease Option. There are hundreds of variations, and if this is your first attempt to purchase a home on a lease option “OBTAIN HELP”! A lease option is similar to buying a home but different enough that most people are not experts. You need profession help when working with lease options, seek the advice of an attorney or a realtor that has experience in lease options. Again, they are not for the first time home buyer as far as the paperwork is concerned, the use of a lease option is perfectly legal and is a effective method to purchase real estate.
The Pro’s & Con’s of Lease Options
There are many people that think Lease Options are the greatest, while others think they breed disaster. The truth is somewhere in between as well as in the details. Like buying any piece of real estate you need to do your due diligence; just like you would do on any real estate transaction. Most people don’t and thus they end up with problems so here is my Top Ten Lists of Do’s and Don’t when you have finally found that property that is right for you:
- Obtain an Appraisal from a Licensed State Appraiser (your local bank or Credit Union can give you a name). Do not use the Seller’s recommendation! The purpose of the appraisal is to determine if the purchase price of the property is in line with other homes in the area. If the property comes in at 20% higher than surrounding homes will the property really be worth that in 1-2 years or whatever the term is in the option agreement (when you need to exercise your option). Otherwise when it comes time to finance the property will not appraise at the value you need to obtain your loan.
- Obtain a Home Inspection from a Home Inspection Company licensed in the state. Again do not use the recommendation of the Seller! Most Lease Option buyers never obtain an inspection thus they never find out about the problems the home has before they need to buy it. Only after they have lived in it for some time, then they start complaining when it comes time to purchase. At that point in time it is to late. The Home Inspection Report costs approximately $200-$400 depending on the size of the home. The purpose of the report is to determine if there are any major problems in the home you are going to purchase. If there are the seller need s to have them repaired and or you might want to do the work for less rent or some other form of consideration.
- Know your credit history before you sign the contract. If you file bankruptcy while in the home it is not likely you will be able to purchase the home when the option comes due. Likewise if you have poor credit you need to think about how you will improve your credit so that you will be able to purchase the home. Seek the assistance of your local bank, mortgage broker, credit union; they will run your credit report and they should tell you exactly what you need to do to qualify for a loan.
- Seek the help of an expert when it is time to review the documents prepared by the seller. An attorney, Realtor or someone very familiar with lease options should be consulted.
- Contact the local building department to see if there are any building code violations on the property.
- Contact the Better Business Bureau (www.BBB.org) and run the name of the seller or his Company through the Bureau and check him/them out.
- Have your attorney run a title search on the property. This insures that the seller really has title to the property. That the property is free of judgments and liens that might effect the purchase down the road. Also have him check and see the balance owed on the property. You need to make sure that what you are paying is not more than what is owed on the property.
- Check the utility companies to see what the monthly utilities are on the property as well as what the real estate taxes are on the property.
- Check with the local police to see if any sex offenders are in the neighborhood or any other problems at this home or the ones nearby.
- Make sure this is the right home for you! Check the school system, local tax rates, fire protection, police services; ASK QUESTIONS-GET ANSWERS.
We talked about the pro’s and con’s:
PRO’S:
- If you have bad credit, poor credit, no credit; you may be able to lease option a home. If you have the deposit/down payment someone may be willing to lease option the home.
- You can lease a home without actually buying it but you have that option to purchase.
- You find the right home but you have great credit but no down payment.
- You are buying the home for investment purposes and do not want to take out another loan.
CON’S
- Not being able to obtain financing when the option period is due.
- Paying more for a property than it is really worth
- Not doing your due diligence and covering your bases!
- Most Sellers (Lessor) accept lease option/lease with option to purchase because their property is overpriced or has been sitting vacant to long.
- Most Buyers (Lessee) want a lease option because they cannot qualify for a loan.
What’s the result: The unqualified Buyer (Lessee) options to purchase an overpriced and or languishing property.
So remember, PROTECT YOURSELF, follow our TOP TEN tips for a lease option and obtain an experts help. If you follow our guidelines you will enjoy all of the benefits of a lease option without the pitfalls.
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Remember,…when an owner leases a property he/she does so to make a profit on the investment. In order to do that (make a profit) she/he has to set the monthly payment higher than his/her mortgage payment on the home. Why would you pay his cost and markup if you could get a mortgage and become the owner?
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