Lease Option - Lease With Option To Purchase
Lease options are becoming more and more poplar for both homeowners and investors alike because of the recent economic turn. Many homeowners have been forced from their homes due to foreclosure, their credit os ruined and now they are looking for a solution besides simply renting... which is why they are turning to lease options.
A lease option is a contract between the owner of home and the tenant/buyer that gives the tenant the option to purchase the property for a certain agreed price in specific amount of time. It is very similar to renting, but with an option to purchase the home in the future. This lease option period typically varies from 1-3 years, during which time the tenant/buyer can exercise his/her right to purchase.
Most lease option agreements require a non-refundable deposit, which is applied to the final purchase of the home if the tenant/buyer exercises his right to purchase. That non-refundable amount is determined by the 2 parties involved. Clearly is you are the owner/investor, you'll want that amount to be as high as possible because if the tenants miss any payments or decide not to buy, you get to keep their down payment. If you're the tenant, you'll want the opposite.
Advantages of Lease Options
One of the most appealing advantages of lease options is that anyone can qualify because it's not based on credit. Most of the time, people will do a lease option when they are fixing credit issues and just need a few years to clean it up and then they'll be ready for a purchase. In the meantime, the "monthly rent payments" are actually applied to the mortgage itself, which means the tenant is paying down the mortgage balance.
It's also an advantage for homeowners in times of economic uncertainty because they are locking in the purchase price today. If the home value goes up over the next 3 years, they might walk in to some nice equity. If the home value goes down, they can just walk away having only lost their deposit.
For the owner, by doing a lease option, the tenants are helping to make the mortgage payment each month. One of biggest advantages of lease with option to purchase is that the tenants will take care of the property because they "may" buy the home in the future. People are more willing to take care of something that's theirs. And if you're a landlord, taking care of the home is extremely important.
Common Questions About Lease Option Purchases
One of the most common lease option questions is, "can the tenant write off their lease option payments?" Unfortunately, the answer is no because the home still belongs to someone else... in a sense it's like renting, but one has the option to buy at the end of the term. Only the owner/landlord has the ability to deduct the mortgage interest.
One of the biggest concerns lately with lease options is feeling confident that the monthly payments are in fact being sent to the lender. There have been several cases pop up where landlords pocket the monthly payment and the home ends up in foreclosure. Not cool! So the best way to avoid any fraudulent or non-paying landlords is to set up a separate bank account that is transparent to everyone because the landlord also wants to see those payments are on time. Remember, the bank doesn't care where the monthly payments come from as long as they get the payment on time.
In the event the tenant fails to make payments, the property owner keeps the deposit, evicts the tenants and starts the process all over again.