Sep
13
2019
Real Estate

How Does A Lease With Option to Buy A House Work

Sandy
Sandy
10 minutes to read.

Most people require a mortgage and a significant down payment to purchase a home. Yet, for those who may not qualify for a traditional mortgage or one of the programs available to help you with them, it can seem impossible to find yourself in a home quickly. Another option is a lease to own transaction.

In its simplest of terms, the promise of a lease to own home is that you can move in, make lease payments, and, one day actually own the home. It seems like a good way to get around the mortgage requirement, but does it really work that way? There’s much to know about this opportunity before you jump into it.

For some people, the lease to own option seems like a good deal. They do not have to meet the credit qualifications to get a mortgage. You may not have to have a large down payment to buy the home. This type of rent-to-own agreement may be available to you right now. In some homes, the investors that own these properties right now are offering impressive quality and beautiful properties. It can be easier to qualify for this agreement. Before you jump in, though, there are a few key things you must know.

How Do Lease Agreements for Rent-to-Own Properties Work?

What you must understand about a lease agreement like this is that it’s much more complicated than a traditional rental agreement. As a result, you will need to ensure you have an attorney read through it to make sure your rights remain protected throughout the process.

There are two main components of a rent-to-own agreement. The first component is the standard lease agreement. This may look and feel much like a rental agreement. The second component is an option to buy. This component gives you the ability to buy the home at some point down the road if you desire to and certain named conditions are met.

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Before getting into more detail, it’s also important to know your state laws. Each state has the right to limit these contracts or to require specific terminology within them. Because there are differences, the information here is a basic overview of what most property owners and buyers can expect.

The Option Component

The option component of this transaction may be the more difficult part to manage. This is also where you will find most contracts differ. In this type of transaction, the home buyer will pay the home seller option money. This gives the buyer the right to purchase the home at a later time. At that time, the buyer enters into an option arrangement. The amount of the option ranges heavily. In some cases, it could be a few hundred dollars. In other cases, it can be thousands. The seller can set this rate where he or she desires.

Both parties must come to an agreement over a variety of details in this process. For example, both parties may agree on a specific purchase price at the time of paying the option money. In other situations, the parties agree that they will set the price at a later time, based on the market value of the home at that time.

Buyers need to be mindful of the process and anything they agree to. It tends to be better for a buyer to lock in the home price now, especially if they do not plan to exercise the option until years down the line. Most commonly, property value rises over time. On the other hand, if you believe the property’s value will fall over time for some reason, waiting until later to set the price may be more beneficial.

It tends to be better for a buyer to lock in the home price now, especially if they do not plan to exercise the option until years down the line. If you believe the property’s value will fall over time for some reason, waiting until later to set the price may be more beneficial.

The second component that needs to be negotiated is the term of the option. In some situations, both parties may agree that the option money will hold the right to buy the property for a set number of months or years. It is common for this term to be one to five year.

Once you agree to these terms, it is very hard to back out of them. In most states, the money you pay for the option is not required to be returned if you decide to not move forward with the transaction. That’s because the option money is meant to provide you with time. In other words, you’re buying time to invest in the home later. During that time, the seller cannot sell the home to anyone else. That protects your future goal to buy it.

The money you pay for the option is not required to be returned if you decide to not move forward with the transaction

The other side of that is that the buyer does not have to buy the property. Most option contracts will specifically state any requirements of the buyer, but remember this is not a full transaction. If at the end of the term, the buyer wants to walk away, he or she can do so. Yet, they do not receive any refund of the option money if they do.

Note the Difference Between Lease Options and Purchase Options

When considering these transaction opportunities, buyers need to know what they are actually paying for with option money. There are two common transactions here – the lease option and the purchase option.

How a Lease Option Works

With a lease option, that’s all you are getting – you are purchasing the right to the property down the road. With a lease option, you are getting the right to lease the home now with the goal to buy it later.

It works in the same basic way. A key difference, though, is that most lease options will have a much larger payment requirement. That means you are paying more into the home now. Here’s how this works:

  • You agree to lease the property from the current owner. This usually will have a timeframe stated.
  • You agree to either a purchase price now or one to be determined at some point in the future.
  • You also agree to a predetermined rental amount for the time you plan to remain in the lease.
  • You pay option money to hold onto the right to buy the property later. This does not generally apply to your down payment.
  • In some situations, you can negotiate the terms so that a portion of each monthly rental payment is put towards the price of the home’s purchase.

During this time, no one has the right to buy the property. You do not have to buy the property at the end of the option period if you decide not to do so.

How a Lease Purchase Works

A lease purchase is yet another way that the property can be sold. There are a few differences in this method compared to the lease option. In this option, the following takes place:

  • The buyer pays the seller the stated option money. This gives the buyer the legal right to buy the home at a set time in the future.
  • Most often, the parties agree to the price of the purchase now. This may be higher than the current market value to account for inflation or market changes.
  • The buyer will lease the property for a specific, defined amount during the term. The term here is more negotiable compared to a lease option.
  • At this point, the buyer of the property agrees to obtain financing for the home. He or she then pays the seller of the property the full value of the home at the time when the lease-purchase is over.
  • During the course of the term, the rental payments generally include a portion that will apply towards the purchase price of the property. Most often, this makes the rental price a bit more expensive than what you would find outside of such agreements in the area.

In a Lease Purchase, the rental payments include a portion that will apply towards the purchase price of the property

In all situations, lease options have pros and cons. There are a few caveats you should be aware of before you dive in.

What You Should Consider About Any Option

If you are thinking about this method to help you to buy a home, remember a few key things.

1: Know Where Your Rent Is Going

Within the agreement, it should clearly define what is happening to the payment you are making each month. It is possible that a portion of these funds will go to the purchase price of the property down the road. This may be expressed as a specific figure or a percentage of each payment. You should factor this into your ability to obtain a loan for the remaining value of the home at the time you are to buy it.

2: Define Home Maintenance

The contract you agree to needs to outline who is responsible for home maintenance during the lease portion. Most of the time, since you do not own the property during this period, it is up to the property owner to maintain it up to required code standards. However, some contracts may build this into your responsibilities. Define each detail, whether it is fixing a hole or mowing the lawn. Who will do it?

3: Know Costs and Rights

Because the seller of the property is still the owner, he or she is still responsible for paying for the home. This includes paying for taxes, insurance on the property – but not necessarily coverage for your belongings, and any association fees. Also, you may still need to get the approval of the seller before making significant changes to the home. Again, be sure this is clearly defined within the description.

What Happens at the End of the Contract?

A big concern for many property buyers is what happens at the end of the rental agreement. If you decide you cannot afford to obtain a mortgage or you no longer want to buy the home, that is a right when you purchase an option. However, you have to recognize that you are unlikely to get any of the deposits you’ve made back unless your contract states that this is a right you have. Any money paid up until this point is likely not to be accessible, though.

Also, in some purchase option contracts, you may be obligated to purchase the property at the end of the term – this depends on state laws and the contract itself. Because this can be financially difficult for some, especially when circumstances change, be leery of these types of requirements. You do not want to face a lawsuit because of a changed decision or the inability to secure a mortgage to complete the sale of the home.

Looking to Sell Your Home Faster?

In some situations, it’s best to move on from an existing ownership. If you are looking for a faster solution to sell your house, consider requesting an offer from SellHouseFast. You’ll receive a cash offer based on your home when you contact us.

Get a cash offer for your house

We are not able to determine an offer price right now.

A local investor will get in touch with you to discuss the sale of your house.

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