I’ve had a couple of buyers ask me recently about using a lease option, or “lease-to-own” agreement to buy a house. Since I have had some experience with this, decided to post about it.
If you wanted to consider lease-to-own, also known as lease-option, of a property, the most likely candidates are vacant homes that are listed for sale, but have been on the market for a while. If a seller hasn’t been able to attract a buyer, and they are getting tired of supporting an empty house, they may consider doing a lease-option.
All terms are negotiable, but a typical scenario might be something like this:
List price : $600,000, vacant property, on the market 60+ days
Offer : $10,000 option money, lease of $3000/month, $500 of lease to apply to down payment, purchase price $585,000 to close at end of 12 month lease period.
Advantages to seller :
- Immediate cash from option money and pre-paid rent.
- Income to help pay the mortgage during the lease period.
Risk to seller:
- Buyer/Tenant may change their mind after living in the house.
- Buyer may damage the property and it will require rehab before re-marketing.
- If values decline, the buyer may walk away at the end of the option period.
Advantages to buyer:
- Can tie up a house today for purchase at a future date, so if value increases would have built-in equity buildup.
- Less cash required to move in.
- Part of rent may be applied to purchase (although rent is often market-rate, or more.)
- Can be good for a buyer who needs to improve credit, complete more time in new job, or save for down payment before buying.
Risks for buyer:
- If the buyer doesn’t buy at the end of the option period, seller gets to keep option money.
- If better house comes up, may not be able to jump on it while tied up in the lease
I bought my first house using a lease option, and it worked well for me. My husband and I were newly-weds with less than 2 years at our jobs, and we didn’t have the required 20% down payment (this was 1978, when 80% loans were the only mortgages available and I don’t think FICO scores were even invented yet.) We gave the seller $2,000 option money, and agreed to buy the house in one year for $100,000 (market value at that time was closer to $95,000) and we agreed to pay $600/month rent. At the end of the year, we came up with the other $18,000 of our down payment and bought the house, which appraised for $125,000 at that time. The interest rates at that time were terrible so we had to take an adjustable at 12.5% because fixed rate loans were 16%. But that allowed us to become “proud homeowners”!
Lease options can be a good solution for both buyers or sellers, but they are not without risks. There are many ways to actually structure the transaction to protect both parties, such as recording the option, or opening a long escrow and using an interim occupancy agreement during the lease period. Please call or email me if you are considering doing this and I will help you figure out the right way to go.
If you have some general questions or comments about this article, please post your comment.
Phone direct : (949) 457-0281