What Is a Lease Option?
A lease with option too purchase (sometimes referred to as "rent-to-own purchase" or "lease purchase") is a lease combined with an option to purchase the property within a specified period, usually 3 years or less, at an agreed-upon price. Such arrangements have proliferated in the post-crisis market because many potential home buyers can’t meet the tougher loan qualification requirements today, and many potential sellers are unable to realize a satisfactory price in any other way. Lease-Option plans can be structured in such a way that both parties benefit
Contract Features of a Lease with Option to Purchase
In a typical arrangement, the borrower pays an option fee, usually up to 5% of the price, which is credited to the purchase price. The borrower pays a market rent, and an additional rent premium that is also credited to the purchase price or closing costs. The option fee, option period, rent, rent premium, and purchase price are all negotiable items. If the purchase option is not exercised, the buyer loses both the option fee and the rent premium.
Buyers generally prefer a long option period because it provides more time to accumulate savings and repair credit. A long period can boomerang on them, however, if they are never able to exercise the option, since they lose the rent premium they have been paying all the while, in addition to the option fee. Sellers generally prefer a short option period, but if it is too short, the house won’t be sold.
The option fee and rent premium are viewed differently by buyers and sellers. To the buyer, they are part of the equity in the house they fully expect to own. To sellers, however, these payments are the best guarantee that their houses will sell; if they don’t sell, the payments are retained as income. That the benefit to the seller generally exceeds the cost to the buyer makes the lease-to-own deal a possible win-win. A lease purchase contract may or may not give the renter/buyer the right to sell the option.
Using a Lease Option to Buy
The Lease-Option offers homeownership opportunities to consumers who can't qualify for a loan from any source, but who are prepared to bet on themselves. The bet is that before the option period expires, they will qualify for the mortgage they need to exercise the purchase option. During the option period, they have the opportunity to rebuild their credit and accumulate savings while living in the house.
Even though it is costly, the right not to exercise the option is of value to buyers. If there is something seriously wrong with the house, neighborhood, or neighbors, the buyer can cut their losses by not exercising the option.
Using a Lease Option to Sell
Most home sellers want a cash sale, but for those prepared to hang on to the property awhile longer, the benefits can be compelling. Buyers unable to become homeowners in any other way will generally be willing to commit to a future price higher than the price at which the property could be sold today.
While the deal may fall through, in that case the seller gets to pocket the option fee and rent premium. The seller also continues to enjoy the tax deduction on his mortgage interest payments during the option period.
We specialize in finding Lease Option homes for you in the Louisville, Ky area and surrounding communities including Jefferson County, Oldham County, Bullitt County, Clark County, Floyd County. Among the cities Included would be Mt Washington, Shepherdsville, Pewee Valley, Crestwood, Prospect, LaGrange in Kentucky, Jeffersonville, Clarksville, Charlestown, New Albany in Indiana.