Real Estate Advice: Lease with Option to Buy

In today's real estate market, a lease with option contract is becoming more and more popular. Many home owners are desperate to sell their homes and finding a buyer who wants a lease option may benefit them as they will still own the home, but are generating a monthly income. They also receive a nonrefundable down payment. Buyers are gravitating more towards this option due to how hard it is to get financed right now. In this case, both parties needs are satisfied. Before considering or signing this kind of contract on either end, it's important to know exactly what a lease with option contract is.

A buyer will locate a home and make an offer. The buyer will make the offer with a "down payment" or "earnest money" check. A monthly rent is agreed upon. The buyers will pay the sellers the rent every month. A portion of the rent may or may not be credited toward the final purchase of the home. This will be clarified in the contract and is based on what both the buyer and seller agree upon in writing. The lease can be as long as the contract states (usually 1-3 years). If the buyers can get themselves into a situation where they are ready to buy the house within the lease, the sellers will sell to them for the price agreed upon when the contract is written. If the buyers fail to buy the house by the time the lease is up, the sellers no longer are required to sell to them. The house remains theirs and they can put it back on the market if they wish. It's important to understand the benefits and drawbacks for each party.

Sellers are flirting with this idea even more now. There are many home owners who are having trouble paying their mortgage. This is a great way to get out of paying the mortgage and still own the home. They will get money up front from the buyers. This money has to be credited to the buyers when they buy the home. For instance, if the contract for the home is $200,000 and the buyers put down $10,000, the $10,000 is the sellers to keep, but when the buyers buy the home they will buy it for $190,000. But, if the buyers decide not to purchase, that $10,000 is legally the seller's. If the sellers agree to rent for, say $1200 per month with $200 going toward the purchase price, at the end of one year should the buyers purchase $2,400 will be deducted from the total price bringing it down to $187,600. Talk to a real estate agent about when they will receive their commissions if you use one.

Even if the buyers decide not to buy the home, it works for the sellers as they are still getting the rent every month and they have the deposit money to keep. Sometimes, it's actually better for the sellers if the buyers decide not to buy in the end. It's also fair to consider that if you are renting your house to someone who intends to buy it, they are going to take care of it better than a normal renter would. Keep in mind, the sellers are still responsible for repairs. Should the water heater burst or roof leak, the sellers would be the ones footing the bill until the buyers actually purchase the home.

A drawback for the seller would be if they are counting on the buyers actually buying the home. This is not a guaranteed sale. So, if you are considering a lease with option be advised that you are still renting. Be prepared for a situation where the buyers don't pay the rent, just like any other renter. The penalty should be covered in a contract. However, situations like these may end up in a legal mess just like any other real estate contract.

Another thing to consider is once your lease is up, you are legally obligated to sell the home for the predetermined price. If the market goes up a year or two from the contract date and the house appraises at more, you are not able to ask for more. The home must be sold for the original contract price.

If you are a buyer who is having difficulty getting approved, this may be a great option for you. If you are wanting to buy but are waiting for something like a settlement check and are having trouble getting approved for a mortgage right now, it could be good. If you are needing to straighten things out with your credit or need a little more time to save for a down payment, a lease with option contract may be something you are heavily considering. This gives you more time to get your finances in order while still locking in a price and taking advantage of the low market. If you're going to rent a home, you may as well rent one that you are eventually going to buy, right? It also may work out well for you if prices rise within the time that you are renting the home. You may actually end up with a fair amount of equity in the house when you do purchase. Don't count on this happening, as the market is continuously moving up and down. We don't know what it will be like in a year or two (or three) from now. The appraisal will almost definitely be different when it comes time to buy and nobody can guarantee if it will be less or more.

But, before you go off looking for a home to write a lease with option contract on, consider negative consequences. Remember, you can't get your down payment back. The seller is counting on you to buy the home within the time frame. If you end up not getting that settlement check in time, or you find you can't get approved for the mortgage, you're going to lose your deposit and all rent paid. You are taking a financial risk.

If you are interested in buying or selling with a lease option contract talk to a licensed real estate agent and a real estate attorney. The laws differ from state to state. You also want to make sure that you have a solid, enforceable contract. It's also important to still have an appraisal and inspections done. So, it's best left to the professionals to guide you through the process.