By:CJ Harrington
Keller Williams Realty
Date:09-16-08
A lease to own home is an option to purchase the property within a specified time period at an agreed upon price. Generally, the borrowed (renter/possible buyer) pays an option fee to the seller of 1 to 5 percent of the price. Also, the borrowed will pay rent and an additional rent premium that is credited to the purchase price. So, if the option is not exercised, the buyer loses both the option fee and the rent premiums. Just like many financial transactions, the lease-purchase option can be structured in such a way that all the benefits flow to one of the parties and none to the other. Be careful. Yet, lease-purchase options can have solid economic rationale, meaning they can be structured so that both parties benefit.Now that you have a general understanding of the lease-purchase option make sure to do the research. It is important to know, that a lease-purchase has a few major provisions. Firstly, the sale price of the house and the rent are market-determined, yet subject to negotiation just as in a straight purchase or rental transaction. Buyers often know less about the market than sellers, which places buyers at a disadvantage unless they do some homework. Also, buyers generally prefer a long option period because it provides more time to build equity and repair credit. However, if they're never able to exercise the option, since they lose the rent premium they have been paying all the while in addition to the option fee. While sellers generally prefer a short option period, but if it is too short, the house won't be sold. So, in reality the option fee and rent premium are viewed differently by buyers and sellers. To the buyer, they're part of the equity in the house they will soon own, since they fully anticipating that they'll exercise the option, the only cost is the interest they would otherwise have earned. To sellers, however, these payments are the best guarantee that their houses will sell; if they don't sell, the payments are retained as income. So, the benefit to the seller generally exceeds the cost to the buyer to make the lease-to-own deal a possible win-win. So, why should you even worry about lease-purchase options?Well, the lease-purchase option offers homeownership opportunities to consumers with little cash and/or poor credit, who are prepared to bet on themselves. Sound anything like today's market? To the optionee, the real bet is that before the option period expires, they'll qualify for the mortgage they need to exercise the purchase option. During the option period, they have the opportunity to rebuild their credit and accumulate equity while living in the house they hope to own.On another note, the development of the subprime market, in which consumers with poor credit or no cash can obtain loans, doesn't seem to have lessened interest in lease-purchase options. It's very likely that those who succeed in exercising their option under a lease-purchase option do better than if they had financed a conventional purchase in the subprime market. The savings in finance costs will more than offset a higher price on the house. But those who can't exercise their option will lose don't be fooled. So, consumers who need to rebuild their credit rating during the option period should understand that paying their rent on time wouldn't do it. Rent payment information is not used in compiling credit scores. While Fair Isaac, the company that developed credit scoring, has recently unveiled an "expansion" score based on "nontraditional credit data," it doesn't yet include rent payment information from individual homeowners. So, lease-purchase option buyers who need a higher credit score must focus on their credit cards and loans.In conclusion, even though it seems costly, the right not to exercise the option is of value to buyers. If there's something seriously wrong with the house, neighborhood, or neighbors, the money left behind on a lease-purchase option is much smaller than the cost of an outright purchase followed by a sale, or even a foreclosure in today's market. So, make yourself and buyers aware of what options are available to them in today's declining market through lease-purchase options.
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