Lease Option Pros and Cons
About Lease Options
A lease option is an arrangement in which a tenant rents (leases) a property from the seller with the option of buying that property when the lease ends or anytime within the duration of the contract. This type of real estate agreement is also known as 'rent to buy' or 'leasing with an option to buy.'
In a lease-option arrangement the tenant pays an extra monthly fee above the rent which is allotted as a down payment toward the future purchase of the home. In lease-option agreements the purchase price of the property is established from the outset, and the contract clearly stipulates the amount of monthly fees that are to be held in escrow by the owner to be later deducted from the total cost of the home should the tenant exercise his option to buy.
Lease options offer important advantages to both would-be buyers and sellers; however, the arrangement also has its drawbacks. The following are some the pros and cons associated with lease-option agreements.
Buyer Pros
•- an innovative means of gradually attaining the goal of home ownership
•- appropriate for buyers with don't qualify for a loan
•- beneficial for buyers who cannot afford a home down payment upfront
•- no grueling credit history check
•- monthly down payments can improve one's credit history
•- sale price is 'locked in' before purchase
•- opportunity to check out a new neighborhood
•- opportunity to test drive the property before purchase
•- opportunity to experience local school systems
•- no obligation to buy
Buyer Cons
•- tenants forfeit all down-payment fees if they decide not to buy
•- non-refundable fees can reach well over thousands of dollars
•- beware of unscrupulous owners who have no intention of selling but simply wish to benefit from the premium fees
•- beware of owners who try to terminate the lease early in the advent of a boom in the real estate market with the hope to sell more quickly
Seller Pros
•- excellent financial solution when the market is slow and people aren't buying
•- since payments are collected gradually each month, sellers are more likely to get full asking price on the purchase of the property
•- if tenants don't exercise their right to buy, the seller still profits from retaining the monthly extra fees; seller can still rent or sell to another party
•- property does not sit vacant
•- rental money can be used toward tax and mortgage expenses, maintenance costs, et cetera
Seller Cons
- beware of potential buyers with un-established or poor credit histories
- beware of potential buyers who have no intention of actually buying and who do not take good care of the property
Legal Issues
An iron-clad legal contract is imperative in lease-to-buy arrangements. The contract should clearly stipulate the following:
•- monthly rental fee
•- monthly premium fee (down payment) towards future purchase of the home
•- predetermined property purchase price
•- duration of the contract (typically two to five years)
•- which parties are responsible to pay for maintenance and repairs
•- protection clause that allows the owner to perform periodic inspections of the property to ensure its proper upkeep
•- stipulation of what decorations, additions, or improvements the tenant is allowed to make on the property
