Are you close to being able to buy a home but aren’t quite ready? or did you just move to South Florida and aren’t sure where you want to live? or maybe you just need to rent right now but really want to buy a home in a few years? Then a Lease with Option to Buy Program may be right for you.
With these programs, potential buyers get to move into a home right away while working on improving their credit score and/or saving for a down payment. Typically, the buyer rents for a set amount of time (usually from 1 to 5 years) then has the option to buy the property from the seller if certain terms and conditions are met.
With a Lease with Option to Buy Agreement, the potential buyer has the right but not the obligation to purchase the property when the lease expires. If the renter decides not to purchase the property at the end of the lease, the option just expires. However, if the Agreement is for a Lease Purchase without an “option”, the renter could be legally obligated to purchase the property at the end of the lease. Therefore, it is important to have an attorney review the documents before signing to confirm that the agreement matches the potential buyer’s intentions.
For most Lease with Option to Buy Agreements, the potential buyer pays the seller a one-time fee that is usually non-refundable. This ‘option money’ is financial incentive for the seller for keeping the property off the market during the time the potential buyer is renting it and for allowing buyer the first option to purchase. The upfront payment can vary from a couple month’s rent to a percentage of the potential purchase price (typically 3-5%). With some programs, a portion of the monthly rent will go toward the purchase of the home. In those programs, the monthly rent would be more than you would pay if you were renting the same house.
There are programs that offer a right to purchase without an option payment but other terms may differ drastically such as whether or not the purchase price is guaranteed and who will be responsible for things like repairs or maintenance of the property.
There are also programs that offer equity sharing arrangements where the potential buyer will get to share in the appreciation of the home while renting by receiving a credit for a predetermined percentage of the appreciation if they decide to buy.
Investopedia does a great job of addressing things a potential buyer should be aware of before considering a lease option agreement. Although some of the pitfalls discussed can be avoided by leasing from a seller who owns the property outright without a mortgage which can be determined by a title search. Also, making sure that seller has paid the property taxes, having the home value assessed and confirming the condition of property are all things that can be done to avoid issues later on.
wikiHow covers other things to consider like what to do if the home needs a little remodeling or cosmetic care. They also discuss other helpful issues like obtaining financing to purchase the home including potentially using the lease option agreement to later qualify for a refinance loan with some lenders.
For most people, the real challenge is finding a home with a seller that would allow a lease with an option to buy. Most take the approach of simply finding a home they would like to buy and asking the seller to consider leasing it to them until they are ready to buy. However, most sellers are not in a financial position to wait for the sale.
A recent, more popular trend is for investment companies to run their own leasing program that allows buyers to select a property that they would like to purchase. The investment company would then make the cash purchase and lease it back to the buyer. Some housing analysts are pointing to these types of agreements as a solution for families who are stuck paying rent but longing for homeownership.
There are certainly a lot of options to consider and the pros and cons must be weighed, but the fact that owning a home is still a significant part of the American dream and one of the greatest contributors to building personal wealth, makes the effort well worth it.
Of course, Realtor.com recommends that you Consult a Professional. “As always when purchasing real estate, it’s important to hire an expert to help you navigate the process and protect your interests.”