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This Guide will provide you with a basic
idea of why a lease option can be a great way to
buy and sell a house or condo!
Let's begin by breaking down the term lease
option... Although the term is used as if
describing one contract, it is really two entirely
separate agreements.
- We have all heard of a lease. If
you don't currently own your home, then
you probably signed one for where you
live.
- An option is the opportunity to purchase by
a future date at a set price.
When you buy a house, you need to come up with
a down payment, fill out credit and financial
forms, pay closing costs, points, fees, etc.
It can be overwhelming, and with the cost of
homes in certain areas, impossible!
The theory behind a lease option is
simple: Lease a home but with an
option to buy.
Benefits for the buyer:
- Lower down payment.
- Portion of monthly lease payment reduces
principle on home.
- No credit check.
- Payments usually lower than mortgage.
- Home appreciates in value while price is
set.
- No additional costs or fees.
- By the time you exercise the option, you
have enough equity in home to qualify for a mortgage.
Most times with no money down and no financial
qualifying.
Benefits for the seller:
- No Realtor commissions.
- No additional fees.
- Monthly rental revenue.
- No maintenance worries.
- Deferred capital gains tax.
- Option/down payments are non-refundable.
For both, buyers and sellers to be successful
with their lease option, a few things need to
happen:
- Buyers and sellers need to get connected.
- Agree on terms of the agreement that
benefits both sides.
- Sign binding contracts.
- Execute option before expiration.
The key points of any lease option agreement
are:
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Down payments
- Option Payments |
Down payments on a lease option can vary
tremendously. In this case, higher is not
better. The most common practice is to pay
between $1,000 and $10,000 down and possibly each
lease anniversary thereafter. All of which goes towards
reducing the principle, but in most cases, is
non-refundable. This is the kicker of the
lease option - The buyer has the opportunity to
accumulate a large down payment over the course of
the lease. The seller keeps the money if the
buyer defaults on the lease or fails to exercise
the option.
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Term
of Lease Agreement |
I have found the most beneficial length of
lease and option is 2 or 3 years. One year
just does not allow reasonable accrued equity from
the home's value appreciation. This is
important because the more equity you own in a
home, the greater the chance that you will need no
money down or qualifying restrictions when you
apply for a mortgage.
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Selling
Price |
The selling price must benefit both the buyer
and the seller. For the seller, he must
consider the future value against the costs
incurred if the home was sold by a realtor.
The buyer must understand that price negotiations
are not common with lease options. Fair
market value is a common starting point, rarely
exceeding 10% higher.
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Percentage
to Reduce Principle |
The percentage of lease payments
that reduces principle is tricky. I have seen some only
take $100 and others 100%. You must be open
to negotiation. Now the buyer can always
pay additional monies, above and beyond the lease
payment, for which 100% would come off of
principle. Most common practice is 50% of
the lease payment to reduce principle or added to
down payment.
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Maintenance
and Improvements |
The difference between a lease option and a
rental agreement is very evident with maintenance
issues. The lease option allows for the
buyer to assume more responsibility when it comes
to repairs and maintenance. But once again,
both parties must come together and agree on
limits. Generally, the buyer is responsible
for all repairs and maintenance for the duration
of the lease.
Upgrades and improvements are quite common in
lease option agreements. Everyone benefits
when the buyer invests in upgrading (increasing
value) the home he is leasing. The home's
value can only increase. Remember, handling of scheduled improvements should be
agreed upon. Normal limitations include
advance notice and, if a do-it-yourself project, evaluate the skill level required for
competent results.
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The best lease option deals occur when both
parties are happy.
Read our case
studies to get more of a real feel for how
these work.
More
on Lease Options
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