The Lease Option - Long Term Property Solution
by LegalNature - April 2012
Although similar to the lease purchase, the lease option has some differences that make it a more viable option for potential home buyers who need a little more flexibility. The lease option is an instrument that is highly customizable and can be manipulated to serve the interests of both the buyer and the seller. Unlike the lease purchase, the lease option is not so definitively structured and has a good deal of flexibility.
Lease option properties are almost always properties in some sort of distress; usually due to financial issues on the part of the owner or a sudden drop in market value. If an owner had the ability to quickly sell the home for the price they wanted, it would not be available for a lease option, so it is important for prospective buyers to keep that in mind. The lease option is usually a mutual benefit to buyers who have poor credit and lack a strong financial position, and home owners in need of some assistance with selling their property or help with payment of the mortgage.
It is important to understand that the lease option is a very flexible document that can be crafted in many different ways. The general rule of a lease option purchase is that is must be exercised within a three year period. The lease option allows the buyer to negotiate this with the seller, and in some circumstances, the option can be carried much further out in order to assist the buyer in repairing credit or saving up for the down payment. In fact, there really is no set time frame for an option other than what the two parties negotiate.
Another flexible aspect of the lease option is that the purchase price can either be locked in at the time of signing or it can be negotiated at the time the option is exercised. This can be beneficial to either party depending on the state of the housing market when the option comes due, however property values do tend to rise over time so it would be more beneficial to a seller to negotiate the price at the end of the lease agreement.
The lease option is also very flexible when it comes to negotiating how the option money is applied and what financing options will be available at the end of the lease. The money put down as the option fee and the residual amount above the monthly rent usually is applied to the purchase price of the home at the end of the lease agreement. However, in a lease option, that money can be negotiated to apply to the down payment of the purchase if the seller agrees. This can go a long way to helping a potential buyer come up with a down payment, especially if they will be trying to secure traditional financing. Another option is for the seller to actually finance the purchase at the conclusion of the lease. If this can be negotiated into the contract, it basically assures that the buyer will be able to purchase the home at the conclusion of the lease because financing is already secured.
There are many ways to shape a lease option and most are beneficial to both the buyers and the seller. It remains a viable option for people with less than perfect credit to achieve home ownership and it benefits sellers who need help selling their property. If properly crafted, the lease option can be an effective tool that serves the needs of all parties involved.