Expand your Possibilities with a Home Lease Option

A lease option is a combination real estate rental, sales and finance technique. It is a property lease, similar to automotive leasing practices, with a fixed time period giving tenant's an option to buy the property at an agreed price during the lease term. In many if not most of lease-option situations a portion of the rent is applied towards a future down payment. This is one of the primary attractions of a lease option purchase where a family struggling to have enough funds for a down payment or closing costs can still get into a home and begin benefiting from this essential asset.

How does a lease option work?

- During the lease agreement, a purchase price that satisfies both the buyer and seller is determined.

- The buyer and seller agree on a time limit for when the buyer must commit to buying the home. This stage provides a lot of flexibility for a buyer trying to save money for the down payment. If they choose an extended amount of time they can make payments towards the mortgage on a monthly basis, chipping away at the ominous down payment cost.

- The seller determines the rent market-value of the home as if the buyer were simply planning on renting the unit. From there, the buyer and seller can determine an amount to add on to the rent price on a monthly basis (anywhere from $20-$200 or more) which can go towards the down payment. This money is non-refundable if the buyer later decides against purchasing the home. For this reason, buyers should be prudent in their monthly commitment if they are not fully committed to going through with the buy option at the end of the lease. The great benefit of putting money towards the down payment on a monthly basis is it acts as a forced savings account, with money being directly paid to the seller.

- Agree upon terms regarding the exercise of the option, such as the escrow period and financing.

- Determine who will pay for inspections, work and warranties when the time comes to complete the purchase.

- Handle the transaction as a lease until you are ready to exercise the option.

Benefits of a lease option for the buyer:

The single greatest benefit for the buyer is that a small amount of cash is due up-front, making the purchasing of a home a viable option for those who might otherwise not have this possibility financially. By slowly paying off the down payment while renting the lessee avoids going into significant debt to obtain the cash for closing on a home. Typically, the credit towards the down payment can be anywhere from 10-100% of the monthly rent depending on the seller.

In addition to the financial advantages of a lease option, a buyer also benefits by living in the home they might want to purchase. This puts them in a prime position to determine whether or not the home will be compatible with their wants and needs. After experiencing neighbors, schools, and the functionality of the home for several years, a buyer is much more educated on the value of their potential purchase, improving the buyer's ability to make a wise decision on the home.

Benefits of a lease option for the seller:

No matter how slow the local real estate market might be, there is almost always a strong demand from lease option buyers. This is because many prospective home buyers can usually afford the monthly payments but they often have insufficient cash for a down payment. As a seller, lease options provide you with an opportunity to sell the house at a good price for you, while serving other financial benefits (especially in a slower market). Some of the benefits include charging a monthly rent higher than market rent, top-market value for the property and tax-free use of the option consideration until the option expires or is exercised. Because the seller still owns the home while it is being leased, you still collect the tax deductions from owning the property.

In addition, the lease option buyer is much more likely to take better care of the unit than a traditional renter because they will treat the home as if it was (or will become) their own. For this reason, even if they opt out of the lease arrangement, during their stay they provided higher than average monthly payments and possible improvements to the property.

Although there are a lot of benefits of purchasing a home through the lease option, anyone getting involved should do their own research making sure that it is the right option for them.