Lease-to-Own with the Option-to-Purchase

I have met a number of people over the years that ask for Lease-to-Own places and I tell them they’ll have better luck looking for rentals. The simple reason is Realtors do not make money on Lease-to-Own transactions, unless he/she is paid upfront. But since this is a poplar subject for people who want to own property I’ll discuss the merits of it and mention a better option.

Lease-to-Own Example
The concept of Lease-to-Own is to have a portion of the rent go to a down payment for the purchase of a property. The renter will pay above average rent with an option to purchase the property at a future date and a predetermined price. For example, if the average rents are $1,500 per month a renter with a one year Lease-to-Own contract might pay $2,000 per month. The extra $500 would go into a separate account and at the end of the contract the renter has the option to purchase the property at the predetermined price with $6,000 for the down payment already saved. If the renter does not choose to purchase the property they typically forfeit the whole down payment.

The Benefit of Lease-to-Own
The advantage to the renter in a Lease-to-Own contract is they get to learn about the neighborhood first hand but more importantly if real estate values increase the seller cannot back out of the deal. In other words the renter is hedging that real estate values with increase more than the agreed to future price. On the other hand if real estate values decrease it is not likely the renter would exercise their option to purchase hence forfeiting their down payment. If the renter has poor credit it does not make sense to enter into a Lease-to-Own contract because they will not be able to obtain a loan and they will have to forfeit their down payment.

Lease-to-Own Contract
It is important that the agreement is in writing. This sounds simple but I have met many renters that believe they are in a Lease-to-Own contract after having a conversation with their landlord with a Lease-to-Own option being discussed. A Lease-to-Own with the Option-to-Purchase contract needs to be formalized in a written contract that specifies the monthly rent, the portion of rent that will go toward the down payment, the sales price and the expiration date of the option. There are other factors that should be in the contract like the right to have an inspection, who decides on and who pays for escrow and title along with many of the same factors found in a real estate purchase contract.

Lease-to-Own Responsibility
During the rental period the owner is responsible for property taxes, insurance, repairs and maintenance of the property. Like with all rental property the landlord would suffer a loss if the property were damaged or destroyed by a natural disaster that occurred during your Lease-to-Own period. However the renter is responsible for their personal property so it is a good idea to have renter’s insurance. Of course, once the renter purchases the property after exercising the Lease-to-Own with the Option-to-Purchase contract, the new owner is responsible for the taxes, insurance, and repairs related to the home.

Because Lease-to-Own agreements can be complex I recommend contacting an attorney to make sure your interests are protected. (I can provide some qualified attorneys)

Another option is Owner Financing, also called Carry Back Loan. I will discuss this next month. If you still have questions contact us at 877homes@gmail.com