Q: What is a lease option?
A: When a renter signs a lease with an option to purchase the property for a specific price within a certain time frame, that’s called a lease option. In most lease-option situations, a portion of the rent is applied to a future down payment.
Lease options are most popular among buyers who don’t have enough funds for a down payment and closing costs and who are also waiting for their credit store to improve. Lease options typically involved a down payment towards the purchase price.
Most sellers, however, typically won’t accept a lease option as they would rather sell their property to a ready and able buyer today, rather than take in a renter who has an option to buy. Additionally, sellers who need the proceeds from selling their house so they can move out of their house, wouldn’t very likely be interested in a lease option.
Q: How do lease options work and what are the benefits?
A: Most lease-option agreements specify that a portion of the rent on the property in question is applied toward the purchase if the option is exercised. This is referred to as rent credit. Institutional lenders accept rent credits as part of the down payment if rental payments exceed the market rent and if a valid lease-purchase agreement is in effect, a copy of which must be attached to the loan application.
For sellers, lease options give them several advantages, especially in a slow market. These include a monthly rent higher than market rent and top-market value for the property. Also, the renter is more likely to treat the property like an owner. Lease options really only have a chance to work when the sellers property is vacant.
Q: What are the disadvantages and potential pitfalls?
A: For the buyer: Tenants who choose not to buy forfeit all extra payments to the seller. Non-refundable outlays of cash can add up to thousands of dollars. Buyer Beware: Beware of homeowners who try to terminate the lease early in hope of a quick sale, or who unscrupulously wish to benefit for above-market rental fees with no intention to sell.
For the seller: People interested in a lease option often have poor or unestablished credit histories, haven’t qualified for a loan and may pose a risk. Tenants who don’t intend to buy may not take good care of the property.
If you have any questions about real estate in the greater Ocean Shores area, contact Jeff Daniel at 360.581.9020. Thank you.