Lease-Options
WHAT IS A LEASE-OPTION OR LEASE-PURCHASE? A lease-option or lease-purchase can be a benefit to both homeowners and to prospective buyers. For a homeowner that has had a home for sale on the market or plans to sell the property in the future it can be an additional tool to sell the house.
Lease-options may be popular and effective in markets where there is an oversupply of homes listed for sale and in markets in which credit restrictions have tightend mortgage requirements or increased rates. When a home seller needs additional cash flow to help defray the mortgage, taxes and insurance payments or chooses to wait for improving market price conditions a lease-option or lease-purchase can be effective.
For a buyer, there are many reasons why a rent to own program may be of interest, inlcuding relocating to a new area and having a home that has not sold in another market. Other reasons may include needing time to repair credit history or to save money for the downpayment requirements of a mortgage. Perhaps at the current mortgage amount or rate the buyer may not presently qualify for a mortgage, but over time employment income is expected to increase.
A lease-option is not the same as a lease-purchase which obligates the buyer to buy, usually within a year or two. Generally, a lease-option is a "soft" agreement between the buyer and seller which provides the buyer with the "option" to purchase the home at "market price" based on appraised value in a future period with no penalties if the buyer chooses not to purchase. A lease-purchase agreement generally establishes a selling price for the property in advance and requires the buyer to provide earnest funds upfront to lock-in the price. If the tenant does not exercise the option the buyer loses the funds deposited. Anohter option for lease-purchase is to charge a higher rent amount which would not be refunded if the option is not exercised.
There are many different ways to structure a lease-option or lease-purchase agreement. In most agreements the seller agrees to credit the tenant with a portion of or all of the rent paid during the lease period. While the buyer does not benefit from the tax benefits from interest deductions, the rent credit does act as a "forced savings program". Of course if the buyer does not exercise the option, they do not receive the rent credits.
Typically safeguards should be built into the agreements including the protection of the buyer by making the agreement (particularly in a lease-purchase) contigent upon appraised value in case market prices decrease. With a locked-in price, the seller forfeits any increase in market prices but benefits from selling the property and the rental income.
LEASE-OPTION PROS AND CONS FOR SELLERS. If your home hasn't sold or if market conditions are not suitable to sell your home consider "rent to own" advantages for you including (a) continued income-tax-deduction benefits, including depreciation, until the option is exercised; (b) upfront cash from the buyer (earnest funds) (c) monthly rent cash flow instead of having a vacant property; (d) there are usually more lease-option buyers than sellers; (e) lease-option or purchase-option tenants usually take care of the property better; and (f) you may reduce transaction costs and fees with a top-dollar option purchase price. The only significant disadvantage for sellers is the lack of an immediate cash sale.
LEASE-OPTION PROS AND CONS FOR BUERS. There are many benefits for rent to own buyers including (a) low upfront cash requirement as compared to buying; (b) its usually cheaper to rent than to own (c) the rent credited toward down payment is like a "forced savings account; (d) if the home goes up in market value, the buyer benefits from a locked-in price and if the home goes down in value you do not have to purchase (make the agreement subject to appraised value); (e) you get to try out the house, neighborhood and area before buying! Not being able to take advantage of home interest and tax deductions is the only real disadvantage, but this is typically more than offset by the rent credit that you will receive and the lower costs of renting versus owning.
If you have questions regarding lease-option or lease-purchase agreements or our available rent to own properties Contact Us.