You may have heard the term “Lease to Own” and wondered what it means and how it works. There are a few scenarios under which a “lease to own” approach to home ownership may be right for you as a buyer.
First, let’s define what “Lease to Own” (also known as lease option) means:
A lease-to-own home purchase is a lease that is combined with an option to purchase a home at an agreed price within a certain period, usually 1 to 3 years. So as far as paperwork goes you will have a purchase contract and a lease contract linked to each other. The borrower pays an option fee, usually 1% to 5% of the purchase price. That fee is credited to the purchase price. The borrower then pays rent and an additional rent premium that is credited to the purchase price. A buyer should be committed to purchasing the home as both the option fee and the rent premium are lost if the buyer does not exercise the purchase option within the time specified in the contract.
So under what scenarios should you, as a buyer, consider a lease to own offer on a property?
· Bad credit: If bad credit is preventing you from securing a home loan (or one at a good rate), then you may want to consider a lease to own, especially if you have steady employment. It will give you a chance to move into the home you want, then immediately start working on improving your credit so you can secure a good loan at a competitive rate once it is time for you to exercise you option to purchase.
· Need to save for a down payment: Low down payment financing is still possible these days, however, having a decent down payment will make your offer more appealing to a seller.
Some benefits:
· Get to know the neighborhood: A lease option scenario give you a chance to move into a home, get to know your neighbors and the neighborhood before you make that final commitment to purchase.
· Lock in the purchase price: If home prices are on an upward trend, you will be able to lock in the purchase price of your home on the day you agree to all purchase-lease terms, even though the actual purchase may not be completed for a year or more.
As with any contract, terms can be negotiated such that they favor one of the parties over the other. So make sure your Realtor negotiates a contract that protects your interests.
Also understand that not all sellers will consider a “lease-to-own” offer. Maybe the seller is moving out of the area and doesn’t want to be bothered with the duties of a landlord. In any case, it never hurts to ask!
Another important point: a lease to own is not an obligation to purchase, it is an option.
As with all complex legal documents, I’d always advise you to seek the counsel of a real estate attorney before signing on the dotted line.
