A lease option to buy enables you rent out your home, but also offers the tenant to the right to buy at a prearranged price after a specified period of time. Leasing a home is also known by other terms such as ‘rent to buy,’ because you receive a monthly rent and at the end of the lease period the tenant has the right to purchase the property if they wish to do so.
There are certain conditions that should be attached to a lease option. These are designed to protect both the owner of the property and the tenant who will in effect be the potential buyer. Here are the more important of these conditions:
• The monthly lease payment (in effect a rental sum)
• The monthly excess fee payable when leasing a home: in effect a payment towards the down payment for the future purchase of the real estate
• The purchase price of the property: this is a fixed price, payable only if the tenant decides to purchase the home at the end of the lease period.
• Statement of the tenant’s responsibility for the maintenance and upkeep of the real estate.
• Restrictions on changes that the tenant can make with regard to home improvements or to the structure.
• Specification that the owner can carry out a periodic inspection at mutually agreed times.
There are advantages and disadvantages to both parties in lease option arrangements. Before leasing a home rather than selling immediately, or to taking up a lease option rather than purchasing immediately, you should be aware of the following facts.
Benefits of Lease Option Agreements to the Potential Buyer
Many people cannot afford to purchase their own home immediately. You might be short of a down payment, or perhaps your credit score is too low. Perhaps the closing fees would be too high for you to raise in the short term, but you would rather not just rent. Rental offers a few benefits, but if your ultimate desire is to own your own home, then you might think the money you are paying in rent is wasted.
By leasing a home you give yourself time to save both for a deposit and for the mortgage closing fees. These fees can be higher than most first-time buyers believe. You will also be able to work on improving your FICO score. You can pay off some high-interest debts, and work on making better use of your credit.
By taking a lease option you can take time to afford to become a home buyer without fear of anybody buying your home from under your feet. You can make improvements in the knowledge that you will ultimately own the property. You can become familiar with the neighborhood, and if you don’t like it you have no compulsion to stay. Also, the purchase price is set in advance, and therefore immune to general housing price increases.
Benefits of Leasing a Home to the Seller
A major benefit of leasing a home to the seller is that they tend to make money immediately rather than wait until their property has been sold. This is particularly of benefit in a depressed housing market. With a lease option you receive upfront monthly payments. The extra payments are not returnable if the lessee decides not to purchase at the end of the lease period.
Disavantages of a Lease Option
For the Buyer: You pay a rental fee plus an extra payment towards the down payment, so that is available at the end of the leasing arrangement. If you decide not to buy, you lose this money. It compensates the seller for being unable to offer their home on the market, and from being unable to increase the selling price according to financial market fluctuations.
For the Seller: You must offer the property at the agreed price, even if comparable prices have been rocketing due to inflation or demand. Sure, you gain if the person fails to take the purchase option, but most do unless prices have dropped in the interim period. You are compensated somewhat by the extra payment, but that is often insufficient to make up the difference between current prices and that originally agreed.
That is fundamentally how a lease option to buy works. It benefits some sellers, but not all. Leasing a home is of more benefit to potential buyers who are strapped for cash over the short term. It enables you to save and raise the money needed for you to buy. The extra monthly payment you make is put towards your down payment if you decide to buy. You lose it if you decide not to.