Leasing with the Option to Buy
Leasing with an option to buy is when a renting tenant signs an agreement with a landlord stating that the tenant can buy the property at the end of a prearranged time period. The owner is obligated to sell at the option price, but the tenant is not obligated to buy. The tenant can buy the property only if the landlord exercises the option.
The lease agreement should have a clause that terminates the option to buy if the tenant in any way violates the lease or gets evicted before closing the agreement to purchase.
Usually, the purchase price is set out in the original lease-option agreement – in other words, the purchase price is set according to today’s market, not in the future when the option may be exercised.
An option to buy doesn’t give the tenant legal title to the real estate. The tenant becomes a purchaser only upon exercise of the option, at which time the landlord-tenant relationship ceases and the option becomes an absolute and binding contract of sale.
A unique feature of the lease-option is the rent credit. The tenant usually pays above-market rent for the property, but a (nonrefundable) portion is credited toward the purchase price if the buyer decides to exercise the purchase option.
In a standard Lease-Purchase Contract, the two parties agree to a lease period during which rent is paid, and the terms of the sale at the end of the lease period, including sale price. Often, the contract is structured in two parts, one representing the lease term and the other a contract of sale.
A lease option is different from a lease-purchase contract, in that a lease-purchase binds both parties to the sale, whereas in a lease-option the buyer has the option but the seller does not.
Buyer Pros
•- an innovative means of gradually attaining the goal of homeownership
•- appropriate for buyers with don't qualify for a loan
•- beneficial for buyers who cannot afford a home down payment upfront
•- no grueling credit history check
•- monthly down payments can improve one's credit history
•- sale price is 'locked in' before purchase
•- opportunity to check out a new neighborhood
•- opportunity to test drive the property before purchase
•- opportunity to experience local school systems
•- no obligation to buy
Buyer Cons *True for lease with an option to buy opportunities are very rare*
•- tenants forfeit all down-payment fees if they decide not to buy
•- non-refundable fees can reach well over thousands of dollars
•- beware of owners who try to terminate the lease early in the advent of a boom in the real estate market with the hope to sell more quickly
Seller Pros
•- excellent financial solution when the market is slow and people aren't buying
•- since payments are collected gradually each month, sellers are more likely to get full asking price on the purchase of the property
•- if tenants don't exercise their right to buy, the seller still profits from retaining the monthly extra fees; seller can still rent or sell to another party
•- property does not sit vacant
•- rental money can be used toward tax and mortgage expenses, maintenance costs, et cetera
Seller Cons
- beware of potential buyers with un-established or poor credit histories
- beware of potential buyers who have no intention of actually buying and who do not take good care of the property
Legal Issues
An iron-clad legal contract is imperative in lease-to-buy arrangements. The contract should clearly stipulate the following:
•- monthly rental fee
•- monthly premium fee (down payment) towards future purchase of the home
•- predetermined property purchase price
•- duration of the contract (typically two to five years)
•- which parties are responsible to pay for maintenance and repairs
•- protection clause that allows the owner to perform periodic inspections of the property to ensure its proper upkeep
•- stipulation of what decorations, additions, or improvements the tenant is allowed to make on the property