What is a Lease Purchase Option?
October 11th, 2006 by aptsherpaA lease option gives would-be buyers the chance to purchase a home, apartment, or condo space after renting it for a certain amount of time. There’s usually an extra fee paid at the beginning of the lease term that will allow you to enter into the lease-purchase option. Lease-purchase options are sometimes offered when the housing market is slow, in part to entice people who may not otherwise be interested in or capable of purchasing a home. Depending on your situation in life and your home-owning aspirations, a lease-purchase option may be appropriate for you. Some of the pros and cons of the lease-purchase concept are covered below. Some agreements put part of your rental payments toward the purchase price; others might only give you first option to buy if the owner decides to sell the property. Keep in mind that the situation will vary with individual contracts and agreements, so make sure you understand the full terms of the deal before signing anything.
Pros
At a basic level, a lease to buy option is attractive because it allows you to build home equity with every rent payment you make. These payments get you closer to owning your own home or living space, and can help alleviate concerns about “throwing away” money on rent. If you’re on the verge of being able to buy your own home but aren’t quite there yet, a lease to buy option may be the thing for you.
A lease-option can be something for you to explore if you are not eligible for a home loan for some reason, perhaps a bad credit history. You may enter into the lease-purchase arrangement thinking that you can, over time, improve your credit rating enough to purchase a house at the end of the lease period. If you work hard to pay off any outstanding debts, make all payment on time, and obtain additional lines of credit, you may be able to turn the lease-purchase arrangement into a great opportunity to buy your own home.
Since lease options are often offered in slow housing markets, it may be possible for a renter to enter into a lease-purchase agreement that offers the option to buy the home for a relatively low price. If the real estate market improves, the renters can then purchase the home for less than it’s worth, and then sell for a high price.
Cons
If a portion of your monthly rental payments is set aside toward the purchase price of the property, your rent will most likely be significantly higher than it might be under a normal rental agreement that doesn’t involve an option to buy. While this is a good way to start accruing funds toward buying a home, it can also be rather expensive. Be sure that you have the financial resources to make your payments before entering into an agreement of this nature.
In addition to monthly payments, you’ll have to make a down payment of some sort to enter into the lease-option agreement. If you’re strapped for cash, this may be difficult for you to handle, and you’ll only have to pay more money later on if you’d like to buy the space. Be careful when entering into a lease-to-purchase agreement, as you can ultimately end up spending more money than you would have allowed for just rent. If you’re not able to purchase the home or apartment at the end of the lease period, you’ll be out a lot more money than you would have been otherwise.
Although a lease-purchase option may sometimes be a good option for people with a bad credit rating who couldn’t buy a home under other circumstances, the arrangement could be disastrous if you don’t end up qualifying for a loan to pay for the rest of the property at the end of the lease term. You’ll have paid far more for rent than you would have otherwise spent, and you will probably have paid additional fees to qualify for the lease-purchase option. If your credit rating is truly troubling, you should wait a while and improve it before entering into a lease to buy agreement.
As with all things, lease-purchase options have distinct pros and cons. If you are almost but not quite ready to enter into the world of property ownership, have a decent credit rating, and can predict with some certainty that you qualify for a home loan, a lease-purchase option may be the right thing for you.
Tags: Buying Apartment, Lease, Lease Agreement, Renting Apartment
November 16th, 2006 at 11:58 am
HOW CAN YOU GET OUT OF A LEASE WITH OPTION AGREEMENT IN MICHIGAN
December 8th, 2006 at 3:07 pm
I know who you are, I’m your landlord/seller, and I will see you in court!
September 16th, 2007 at 2:48 pm
Who’s your landlord? I am!
November 8th, 2007 at 4:12 pm
Looking to lease-option in Missouri, are the laws compatible ?
April 11th, 2008 at 12:16 pm
simple sell all your assets and run away to Mexico
May 6th, 2008 at 1:00 pm
JUST WALK AWAY FROM THE PROPERTY
July 2nd, 2008 at 10:41 am
If the owner could actually sell the property they wouldn’t need a lease to buy option. Grow a pair, low ball them, and purchase it.
October 8th, 2008 at 9:23 am
Don’t exercise the option. It is called an option for a reason.
October 23rd, 2008 at 5:47 pm
It is a great option for everyone. I have a property and am looking to allocate $150 per month toward the potential downpayment on the property. This helps insure that the tenant takes care of the property and even if they are in it for 4 years, it is still less than half the realtors commision that I would have paid otherwise to sell it outright. Win win.
February 22nd, 2009 at 12:48 am
Just something I learned the hard way recently…make sure that if you sign a lease-purchase agreement, you do so with a seller who can be trusted. We made an agreement in fall of 07, to lease until this coming March, and buy the place for a certain amount. I had a consultation with an attorney to help me write up our agreement (I chose to have him tell me how to do it rather than pay him $200 to do it, which may have been a mistake.) We all (my husband and I, a notary, the seller/owner, and two witnesses) signed the agreement, stating that we would pay X amount every month until March 2009, at which time we would pay X amount to purchase the property.
When it came time to start looking around for financing, I decided I should check the payoff balance with the bank where the place is financed currently, to make sure I had an exact amount, I knew it may be as much as a few hundred off from what the amount on our agreement stated due to interest. To my surprise, the amount was almost 50% more than what we had agreed to pay. The seller has yet to offer any explanation and has instead decided to find someone else to sucker into thinking they are going to pay less than what the price really is. She already has someone lined up to move in here in a couple of months, and we are required to be out when our lease is up, because she is mad that we won’t just pay the extra amount. I am not sure why there is such an increase now, of course the bank won’t give me any details about the account. I believe the owner refinanced the property because she needed the money and just expects us to take up the payments on that too.
After speaking to the same attorney that advised me on how to write the contract, it seems that we will have to pay him a couple thousand dollars to take her to court and hope that our agreement was valid enough for her to come up with the difference…I honestly would rather just be done with the whole mess.
We left a very large, nice rental to move to this much smaller place, and have put money into repairs and trying to fix it up for our family thinking we were going to own it. The bank basically agreed when we first decided to do this that they would not have a problem with us taking up the note when it came time as long as we had a couple thousand down. So, that is all we worried about saving for a down payment all this time. Had we known this was going to happen, we gladly would have remained in our rental until we had saved enough money for a large down payment to buy a better house.
Now, we are stuck having to move by this summer, with a very tiny down payment, no financing for anything else but this home, expecting our last child, and nothing at all to show for all the time and funds we put into this place.
I think lease-purchase options can be a great thing for buyers who may not be able to buy something at the time but will be able to after a year or so. I also think it would be great for families with children, like us, who may need a place to go but cannot buy yet, so they won’t have to make too many moves. But, unless the buyer is willing to pay extra money up-front for an attorney to assist with the agreement, and then to pay an attorney to straighten up any conflicts in order to protect what investment they have made, it’s just a waste, nothing more than just a rental.
I know we were naive and trusted this seller to do the right thing, after all, she was a good friend of my mother’s, and besides, we signed papers…we wrongly assumed that protected us. But I would gladly spread the details of our mistake to anyone considering a lease-purchase agreement, just so they would know the risk involved, and to be extra careful about entering into something like this without covering all the bases.
March 5th, 2009 at 9:22 am
Super-Duper site! I am loving it!! Will come back again - taking you feeds also, Thanks.