This Guide will provide you with a basic
idea of why a lease option (rent to own) can be a great way to
buy and sell a house or condo! To
complete the process we offer our
Lease Option Kit.
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 within one contract.
-
We have all heard of leasing
or renting. If
you don't currently own your home, then
you probably signed a rental or lease
agreement for the home, condo or
apartment where you
live.
-
An option is the opportunity to purchase
the home at
a future date based on a price you previously set with the
homeowner.
When you buy a house, you need to come up with
a large down payment, credit & financial
forms, closing costs, points, fees, etc.
It can be overwhelming! But today,
with homes being under-valued, a lease option
benefits both parties involved.
The theory behind a lease option is
simple: Lease a home but with an
option to buy (rent to own).
Benefits for the buyer:
-
Lower down payment.
-
Portion of monthly lease payment reduces
principle on home.
-
No credit check.
-
Payments usually lower than
a conventional mortgage.
-
Home appreciates in value while price is
already set in the agreement.
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No security fee.
-
No additional costs or fees.
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By the time you exercise the option, you
have enough equity in home to qualify for a
conventional mortgage.
Most times with no money down and no financial
qualifying.
Benefits for the seller:
-
No realtor commissions.
-
No additional fees.
-
Monthly rental revenue.
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No maintenance worries.
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Deferred capital gains tax.
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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
benefit both sides.
-
Sign a binding agreement.
-
Execute option before expiration.
The key points of any lease option agreement
are:
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Amount of down/option
payment.
-
Length of
lease/option term.
-
Selling price.
-
Percentage of
rent to reduce principle.
-
Upgrade/maintenance
responsibility.
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. Generally this down payment
negates the need for a security deposit.
This is the kicker of the
lease option - The buyer has the opportunity to
accumulate a 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.
The most beneficial
length of
lease and option is 2 to 4 years. One year
does not allow reasonable accrued equity from
the home's 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.
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. Today
homes are selling for much less than
their value from a few years back.
Some are worth less than what is
currently owed to the bank. This
is where a lease option is appealing to
the seller. As the buyer, you are
able to agree on a higher sale price,
counting on appreciation in the coming
years. For the seller, this is
appealing because they could never sell
at such a favorable price in today's
market.
The percentage of lease payments
that reduces principle is tricky.
The range can spread between 10% to 100%.
This is the second area of negotiation
after the selling price. 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 act as added
down payment.
The difference between a lease option and a
rental agreement is very evident with maintenance
issues. The lease option requires 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. Handling 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.
Read our
case
studies to get more of a real feel for how
these work.
"The best lease option deals occur when both
parties are happy. It is very important to
have a proper agreement set and ready to go.
The lease option agreement replaces the
boiler-plate rental agreement. At USA
Lease Options, we provide the
Lease Option Kit
to take you through the process of how to
approach the seller/homeowner and the forms
required to complete the transaction."
