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The Lease Option

How it Works

Often the biggest obstacle to becoming a homeowner is coming up with enough cash for a down payment. One way for cash-strapped home buyers to realize their dream is to Lease a home with an Option to buy.

Here's How a Lease Option Works: 

The buyer (called an Optionee) Leases the property from the seller (called an Optionor) for a period of time. The Lease agreement gives the Optionee the right to buy the property at the end of the lease period, or earlier by mutual agreement, at a price agreed upon in the agreement. 

Option Consideration:

The Optionee pays a sum, called Option money, to the seller at the onset of the Lease. This money is applied to the purchase price if the Option is exercised. The Option money is forfeited to the seller if the Optionee doesn't go through with the purchase.

Terms of a Lease Option are Negotiable:

Like any agreement, the terms of a Lease Option are negotiable: the length of the lease, the amount of the Option money, the purchase price and the rent. Sometimes, a seller will agree to credit a portion of the rent toward the purchase, providing an additional incentive for the buyer to go through with the purchase.

Option Consideration is Usually Less Than Down Payment Required by Lender:

Even though the amount of the Option money is negotiable, it's usually less than the down payment amount required to purchase an equivalent property. So, for relatively little upfront cash, a Lease Option allows the buyer to tie up a property at today's prices, and live in it before deciding to buy it. During the lease period, the seller cannot sell the property to another buyer.

House Hunting Tip: 

If you're buying in a market where home prices are rising, a Lease Option might be a great deal. But, you could end up over-paying for a property if market values decline between the date you agree on a purchase price and the date you exercise your Option.

Two Parts to a Lease Option Agreement:

There are two parts to a Lease Option agreement. It is a agreement that combines the right of occupancy (the Lease agreement) with the right to Purchase (the Option agreement) which deals with the terms of the purchase.  

Sale of Another House:

Home buyers who have a house to sell in another location might be able to use a Lease Option to their advantage. Let's say you need the equity out of your current home in order to buy a new home. If the market is slow in the area you're leaving, it might take some time for your home to sell. A Lease Option gives you a place to live, time to sell your home and a guaranteed right to buy the property at an agreed price.

Very Few Lease Option Listings are Offered:

Don't be surprised if you don't find a lot of listings offered on a Lease Option basis. In a seller's market, listings usually sell quickly for all cash. But, Lease Options do become popular in soft markets when sellers are having a difficult time selling.

Lease Options Will Probably Not Work if Seller Needs Cash to Buy Another Home:

Regardless of the market, if the sellers need cash from the sale of their home to purchase another home, a Lease Option probably won't work. But, you may be able to create a Lease Option opportunity by searching the "for sale by owner" ads for a property owner who can be convinced to give you a Lease with an Option to buy.

The Closing: 

Since you forfeit your Option money if you don't go through with the purchase, don't Option a property that you have no intention of buying. Negotiate a straight Lease and save your Option money for a home you're serious about buying.