Homes With Lease Option to Purchase–A Selling and Purchasing Alternative

Homes with a lease option can be a great alternative when selling a home in a tough market.  Homes with a lease option can also provide a great alternative to a potential home buyer who doesn’t have what it takes to purchase a home in the more traditional way.

SELLER’S CHALLENGE

In a typical market most home sellers need to sell their home in order to purchase their next one.  They need the equity from their sale in order to provide the down payment for their purchase. The normal action is to hire a Realtor who advertises the property to the world and waits patiently for a buyer. But what happens when everything is done right and you can’t find a buyer to save your life?

BUYER’S CHALLENGE

When times are tough financially things can go bad quickly.  It doesn’t take long, in many cases, when someone loses their job and has to face the possibility of foreclosure.  When foreclosure takes place it drastically reduceS the home owner’s credit score making it all but impossible to finance another home for quite some time.  Medical bills can also cause nightmares.

So when things are bad what do buyers and sellers do?

They consider homes with a lease option to purchase. 

A lease means rent; an option to purchase means the buyer has the option to purchase the property AFTER the rental period is over.

Once the buyer and seller know the basics of a lease option it opens up new alternatives for both of them.  Let’s see how it works.

Sue the seller needs to sell her property and Bart the buyer needs to buy one. The problem is Sue’s house has been on the market for over a year; she can’t wait any longer.  Bart just went through a bankruptcy because of medical reasons and can’t buy a home because of bad credit.

So, Bart and Sue get together to discuss a lease option to purchase.  For the lease part they discuss the following:

• Length of the lease
• Monthly rent
• Who pays what utilities
• Individual responsibilities

For the option to purchase part they discuss:

• Purchase Price
• Down Payment
• Monthly payments
• What appliances stay

After much deliberation it’s been decided that Bart will lease the property for two years (24 months) for $1,500 a month which includes the water.  Bart is responsible for all maintenance and upkeep.  Nothing major can be done to the property during the lease.

It’s also decided that Bart will pay $5,000 up front along with an additional $200 per month in a separate account (escrow account) in the event he decides to carry through with the purchase.  If he does purchase the property the purchase price will be $200,000.00 which includes all of the appliances except the freezer in the garage.

Fast forward two years.

The option to purchase deadline is fast approaching.  Bart did everything right and his credit is now good enough to obtain a regular 30 year mortgage.

If he decides to purchase the property at the agreed upon $200,000 he’ll be able to use the $5,000 down payment PLUS the $4,800 in escrow ($200/month for 24 months) towards the purchase price.  With $9,800 in total, he’ll only have to finance $190,200.

However, if he decides NOT to purchase the property, Sue gets to keep the $9,800 and they both part their separate ways.  Sue will attempt to sell her property again and Bart will purchase another home.

The good news is the lease option gave both Sue and Bart alternative options during particularly difficult times.  Without the lease option Sue would have lost her home and Bart would have been in a stuffed 1 bedroom apartment listening to polka through thin walls.

In summary homes with a lease option can be a great alternative to selling a home in a tough market and/or someone with bad credit.  With a little extra understanding, homes with a lease option provide a solution where none previously existed.