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Last Updated: Nov 2nd, 2009 - 17:32:57 |
Leasing with the option to buy opens up the home buying market for renters
Eighteen months ago, Philip and Francine Allen were confident they could meet a monthly mortgage payment similar to their monthly rent payment. But it seemed to them that it would take forever to save for a down payment and closing costs--that is, until they learned about leasing with the option to buy. Today, the Allens are closing on the home of their dreams after putting down considerably less than a typical down payment and making rent credit payments for the past 18 months.
Leasing with the option to buy is probably the form of financing that's least understood by salespeople and prospective buyers. But it may be the solution for buyers who need time to save for a down payment or closing costs, to cure credit deficiencies, or to resolve problems precluding a short-term closing.
Leasing with the option to buy is a hybrid between an outright contract to purchase--with established sales price, financing terms, and date of closing--and a lease, which provides for a limited term of use of a property in exchange for rent. A lease-with-option-to-buy agreement between a buyer and a seller lists the purchase price, the amount of option funds, the length of option period, the rental amount, and the rental credit.
As with any other sales contract, the terms and conditions between the seller and the buyer are negotiable. However, since the buyer's financial parameters will govern much of the transaction's structure, the buyer must give the seller an incentive to negotiate. That's usually done with the purchase price. Many buyers come close to meeting the listing price.
Leasing with the option to buy has several benefits for the seller. First, it attracts prospective buyers from out of town who want immediate occupancy and those who would otherwise delay their home purchase. Such efficiency minimizes potential carrying costs for sellers on their former residence.
Second, leasing with the option to buy enables the seller to cover the monthly mortgage payment on the house. Since option funds are typically delivered to the seller when the lease is executed but aren't taxable until the sale is closed or the option term expires, the seller may use them to buy in a new location.
Third, because the seller is offering favorable terms to the buyer, a higher sales price can often be negotiated than if the buyer were paying cash and closing quickly. Buyers seem to understand the concept of trading price for time and rent credit, which can make it easier for the seller to get the best possible price.
Finally, the seller should have more confidence in the quality of the tenant because, by virtue of the option funds and the higher-than-market-value rent payment, the tenant has shown a serious intent to buy. Because they anticipate owning it, such tenants may take better care of the property than would other tenants.
The lease option benefits the buyer as well. If the purchase price is negotiated at the home's current market value, the buyer will begin building equity before closing as the home's value appreciates.
In addition, the buyer takes immediate possession of the property while accumulating funds for a down payment and closing costs--sort of a forced savings plan.
For the buyer, the prospect of losing the deposit option funds isn't a pleasant one. But since this possibility is stated at the beginning, it won't come as a surprise. Depending on how the option agreement is structured, the buyer may want to be able to assign the option agreement to another buyer. In doing so, the buyer could recover the option funds from the new buyer. As long as closing occurs, the seller is usually satisfied. Another alternative would be that the seller and the buyer agree to extend the option period by negotiating additional option funds or increasing the purchase price.
Although this type of transaction is a little more complicated than some of the others, it helps prospective buyers become homeowners. Sellers will be happy they're out of the property and pleased to have renters who may take better care of the home than would renters with no stake in it. Leasing with the option to buy works out well for both sides 99 percent of the time.
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