Lease Option (AKA Rent-to-Own)

A Lease Option allows borrowers who don't currently qualify to buy, to get into their home and begin building equity while they work on their credit profile. For sellers, it's a solution for selling in a sluggish market.

Benefits of Leasing to Own for Tenant/Buyer

Main Advantages

• Minimum cash may be required up front. Sometimes buyers with credit problems will benefit from this purchase method, since sellers may finance you, OR the method affords you time to repair less-than-stellar credit before you purchase, using a mortgage loan you acquire yourself.
• Your home buying power is increased, as you now have the ability to purchase using alternative methods (Lease Purchase or Lease Option).
• You have faster equity growth than if you were just renting, and faster than with conventional financing. Some of your rental or option money is working for you towards the purchase. You may have a lower down payment at closing since you will have option money or rental credits to apply. By the time you purchase, prices may have appreciated beyond your locked-in price, giving you additional equity when you eventually sell.v
• A lease purchase gives you sufficient time to check out all the features and faults of the house. Also, you have time to check out the neighborhood, schools, churches, temples, synagogues, nearby shopping, health care facilities, recreation, and your next door neighbor before you buy the house.
• With a lease purchase, you skip paying traditional down payment and other fees normally found in a purchase using conventional mortgages.
• While you are leasing, you have no taxes or property insurance to pay (the owner does that). Major repairs are normally the owner's responsibility until you buy the house, at which time YOU become the owner!
• When it comes time to purchase, many mortgage lenders have programs that let you refinance to buy your home. This means that your down payment and rent credits from your lease can apply as your down payment when you purchase! Most lenders require 12 consecutive monthly rent payments, in good standing.v
• Every type of home is available for lease purchase in all price ranges and locations.

What is the first step?

Typically, your first step is to create a timeline. This timeline is for repairing your credit and determining the steps you need to take so that you can purchase your home within 1-2 years. Many owners offering Lease Purchases can work with you on the many options, provide flexible down payments and tailor the transaction to your needs. Many have a can-do attitude and tailor the deal to best suit your needs.

When Can I Move In?

Many lease to own homes are vacant and available now! Once you are approved, you may be in your home within 3-5 days.

Lease Purchase Agreements

A Lease Purchase Agreement is usually two separate agreements between the parties: a Lease Agreement and a Purchase Agreement. The Lease Agreement is a fairly standard rental agreement. The Lease Purchase Agreement is a purchase/sale agreement whereas the tenant/buyer is contracting to purchase the house for a specified price and term. The Lease Purchase shows a definite intent to purchase the property, and sets the terms upon which the sale of the property will occur. This differs from a Lease Option where the tenant/buyer has the right but not obligation to purchase the property.

The value of the home may increase if the Lease Purchase Agreement has a term of many months or years, but the price and other terms are fixed in the purchase agreement. The seller cannot sell the house to anyone else as long as the Lease Purchase Agreement is in force.

The Purchase Agreement should contain all the terms normally found in a Purchase Agreement, including such issues as closing costs, buyer's inspection rights, what the seller's disclosure obligations will be, what personal property will be included or excluded from the sale, and what will happen in the event either party does not comply with the contract.

There is no standard lease purchase agreement, so read over the entire agreement and know who you are dealing with. If in doubt, run any forms by your lawyer prior to signing.

What is a Lease Option to Purchase?

Often the biggest obstacle to becoming a homeowner is coming up with enough cash for a down payment. One way for cash-strapped home buyers to realize their dream is to lease a home with an option to buy.

Here's how a lease option works. The buyer (called an optionee) leases the property from the seller (called an optionor) for a period of time. The lease contract gives the optionee the right to buy the property at the end of the lease period, or earlier by mutual agreement, at a price agreed upon in the contract.

The optionee pays a sum, called option money, to the seller at the beginning of the lease. This money is applied to the purchase price of the home if the option is exercised. The option money is forfeited to the seller if the optionee doesn't go through with the purchase. The option money is non-refundable.

Like any contract, the terms of a lease option are negotiable. The length of the lease typically can be 12 to 24 months, but anything may be agreed upon. The amount of the option money, the purchase price and the rent amount per month may also be up for negotiation. Sometimes a seller will agree to credit a portion of the rent toward the purchase, providing an additional incentive for the buyer to go through with the purchase. One thing is certain: during the lease period, the seller cannot sell the property to another buyer!

Even though the amount of the option money is negotiable, it's usually less than the down payment amount required to purchase the property following conventional practices. So for relatively little cash up front, a lease option allows the buyer to tie up a property at today's prices, and live in it before making a decision to purchase. If you're buying in a market where home prices are rising, a lease option might be a wise choice because you set the purchase price up front.

There are two parts to a lease option agreement. The first deals with the terms of the lease (rent), and looks like a standard lease agreement. The second deals with the terms of the purchase and looks like a normal purchase agreement.

Home buyers who have a house to sell in another location may be able to lease option a home to give them a place to live and time to sell their home. Then they are able to use their equity from the sale to purchase the home they are renting at an agreed price.

NOTE: Since you forfeit your option money if you don't go through with the purchase, don't option a property that you have no intention of buying

Owner Financing?

Owner financing, simply stated, is a seller willing to help a buyer by financing part or all of the purchase price. Usually, the buyer makes a down payment and the seller will carry a first mortgage, second mortgage or Vendor Terms Contract.

Lease Option Agreements

A Lease Option agreement is usually two separate agreements between the parties: a Lease and an Option Agreement. The Lease Agreement is a fairly standard rental agreement. The Option Agreement is a purchase/sale agreement whereas the tenant/buyer has the exclusive right to purchase the house for a specified price and term. The price of the home may increase if the Option Agreement has a term of many months or years. The seller cannot sell the house to anyone else as long as the Option Agreement is present.

The tenant/buyer leases the house for a specific monthly rent and term. Part of the rent may or may not be applied to the purchase price. The Earnest Money Deposit (also called an option fee), price and terms of the sale are negotiated in the Option Agreement.

The Lease Agreement usually has a default clause. If the tenant/buyer does not pay the rent as agreed in the Lease Agreement, the Option Agreement is null and void, and the Earnest Money Deposit is forfeited by the tenant/buyer.

Lease Option arrangements work very well for buyers needing to improve their credit. The tenant/buyer can find a home they wish to purchase, move in, enroll their children in school and enjoy the home while rebuilding their credit.

Many lenders consider the execution of the Option Agreement as a refinance loan instead of a purchase loan. A refinance loan usually has more liberal underwriting criterion than a purchase loan. Therefore, refinance loans are easier to qualify. Also, increased equity may be considered in the loan to value calculation.

Some lenders recommend that sellers lease option a home to a tenant/buyer before carrying a mortgage for the buyer. This way the seller will have a payment history with the buyer, and proof of the buyer's ability to handle financial responsibility. Foreclosure of a mortgage is a much more difficult and lengthy process than an eviction on a lease agreement.

Benefits of Lease Optioning for Landlord/Sellers

Benefits of Offering Lease Purchasing For Property Owner

Lease Purchase or Lease Option Agreements are a great way to sell property, whether it is a rental property or your own residence, in a sluggish market. It offers the buyer an opportunity to become a homeowner, not just a renter, and an opportunity for which your buyer will be extremely grateful. Because of the features and benefits, Lease Purchases and Lease Options are used by some of the most experienced real estate owners and investors.

Benefits of Lease Purchase for the Landlord/Seller

If you don't need all your equity right now, the best way to get your full asking price and a higher than average monthly rent for your home is to sell it on a Lease Purchase. Since you are assisting the tenant/buyer with a plan for home ownership, they tend to be willing to pay a higher sales price and higher than average rent to get started on that path. Help your Tenant/buyers understand the concept of trading price for time and value.

When you offer a Lease Purchase on your home, you receive a non-refundable option deposit. You determine the amount of the deposit you require. You will receive the majority of your profits at closing, when and if the tenant/buyer exercises his option to buy. In the event the tenant/buyer defaults or allows the option to expire, you will retain the non refundable option deposit. You are then free to begin the process again.

Additional Benefits For the Landlord/Seller

• Sales Price At the Top of the Range: You attract more buyers who are willing to pay a premium to get on the path to home ownership, allowing them time to raise a larger down payment or improve their current financial situation.
• Above Market Rent: Since you are flexible on the terms to accommodate the Tenant/buyer's situation, you can demand a higher than usual rent.
• Positive Cash Flow: Since you can demand a higher than usual rent, your positive cash flow will increase.
• Non-Refundable Option Consideration - Up Front Minimum Risk: When a tenant/buyer signs a Lease Purchase Agreement, you receive a non-refundable option deposit that is yours to keep should they default or decide not to buy.
• Faster Marketing: Because Lease Purchases are in high demand, you will save on advertising costs because your home will move more quickly. Also, you can offer your property for straight rent and for Lease Purchase at the same time. You are now drawing the interest of a larger market: the regular tenants and those in the market to purchase a home. Time on the market is much shorter than if you have the property listed for sale only.
• No Agent Commissions: Since you are selling your home by owner, you will avoid paying real estate agent commission, which can add up to thousands of dollars.
• Attraction of the Highest Quality Tenants: Because you are renting to tenants who have a vested interest in your home, they think like homeowners and tend to take good care of it.
• Less Maintenance: Tenants who have a vested interest and believe they are a homeowner may feel a "pride of ownership" that encourages them to pay on time, perform maintenance and make improvements to your home. Just make sure you require prior written approval for any improvements your tenant makes to the home.
• Tax Benefits: Because your name is on the title, tax benefits are in place for you until you actually sale the property.
• Easier For Tenant To Get Home Loan: Lease Purchases over 12 months in length may make the qualification process for a mortgage easier for the tenant, and make a large loan with a lower down payment possible. This will help you close the transaction at a higher price.

^* Additional terms and conditions apply

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