Lease-to-Own Options Explained
While accurate statistics have been difficult to obtain, anecdotal evidence suggests that so-called Lease-to-Own Options are increasing in popularity. Under such arrangements, the homebuyer will pay rent to the seller for a fixed amount of time, after which he has the option to purchase the home outright. In this way, “Homebuyers save toward the purchase — often, a portion of the rent is designated for the down payment — while giving the seller some rental income in the meantime.”
The precise mechanics vary according to each situation, but “Most lease-option deals involve a two-year lease that can be extended to three or four years if a buyer’s credit isn’t expected to be good enough to obtain a mortgage after only two years.” In some situations, the lease can be as long as ten years. After its expiration, the buyer has the option to buy the home for a price that is agreed-upon in advance. Because of the uncertainty surrounding the current housing market, however, many lease option contracts are currently being written without negotiating a sales price.
These arrangements offer two main benefits to the homebuyer. First of all, it affords one the opportunity to “try out” a house before committing to buy it. Secondly, it can ease the financial burden of home ownership: “Local experts say rent-to-own agreements, also called lease options, are a way for prospective buyers with cash shortages or credit problems to build up a down payment while repairing their credit.” This financing approach is especially useful for luxury homes, which has been plagued by “the worst environment for jumbo lending in the last 20 years.”
There is no necessary financial benefit to the seller, other than it could allow him to attract a buyer that otherwise wouldn’t be able to afford the property. Some experts warn, however, that “Lease-option agreements rarely result in sales because buyers back out or fail to qualify when the lease expires.” Unfortunately, real estate agents may be especially guilty in highlighting this negative, since their fee structures are slanted towards outright sales, rather than lease options.
Ultimately, if this type of financing is intriguing to you, there’s no reason not to ask the buyer to consider it, if it can help to close the deal. Here are some issues to consider: “How much of the rental payment will go toward the down payment? Will the renter pay above-market rent to compensate for the down payment fund? Who will handle maintenance and repairs?” Another expert recommends that you, “Don’t agree to an ‘option fee,’ or non-refundable deposit, larger than what you can afford to lose if you decide not to buy.” Of course, you should also remember to speak to a financial counselor to make sure that it’s appropriate for you.