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Lease Options Are More Flexible
Although similar to the lease purchase, the lease option has some differences that make it a more viable option for potential buyers who need a little more flexibility. A lease purchase agreement is a contractual arrangement where the tenant commits to buying the property at the end of the lease term, whereas a lease option provides the right but not the obligation to purchase. The lease purchase obliges the tenant to buy the property at the end of the lease, while a lease option gives potential buyers the flexibility to decide whether or not to proceed with the purchase. 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.
Why Lease Options Become Available
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. Many potential buyers may not have enough funds for a traditional down payment, making lease options and other rent-to-own agreements attractive alternatives. 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, lack a strong financial position, or do not have enough funds for upfront costs, and property owners in need of some assistance with selling their property or help with payment of the mortgage. The property owner may prefer a lease option or other rent-to-own agreements to attract buyers who need time to improve their financial situation while maintaining some control over the sale process.
Crafting a Lease Option
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 it 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.
The rental period determines when the renter can exercise the purchase option, and the right to buy typically expires when the lease ends. The purchase price, often referred to as the negotiated price, can either be locked in at the beginning of the agreement or set at the time the purchase option is exercised. This flexibility in the negotiated price can benefit 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 specific terms are determined by negotiation between the buyer and the other party (the seller).
Ways the Option Money Can Be Applied
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 option fee is typically a non-refundable upfront fee, which serves as valuable consideration for the right to purchase. The money paid as the option fee and any amount paid above the monthly rental does not automatically count toward the purchase price unless the tenant agrees and it is explicitly stated in the contract. These payments are often non-refundable and serve specific contractual purposes, such as option premiums or consideration.
During the rental period, the landlord benefits from monthly income from the tenant, and the monthly rental may be higher than a standard lease. The tenant will continue to pay rent on the same property they may eventually purchase.
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.
Lease Options Benefit Buyer and Seller
There are many ways to shape a lease option and most are beneficial to both the buyer 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.
