Leasing with an option to buy is an often-overlooked type of financing that can make home ownership a reality for cash-strapped buyers, according to the Greater Louisville Association of Realtors®.
According to John May, president of the Greater Louisville Association of Realtors®, a lease-purchase option offers a dual advantage, by giving buyers time to accumulate down payment or closing costs funds, while eventually netting the seller a return as favorable as that realized on a more immediate sale.
A lease-purchase option is a cross between a typical contract-of-purchase and a lease, and is scarcely different from writing a contract with a delayed closing, he says. "Although this type of transaction is a little more complicated than some of the others, it helps prospective buyers become homeowners. Sellers will be happy they're out of the property and pleased to have renters who may take better care of the home than would renters with no stake in it," May says.
A lease purchase option agreement generally lists the purchase price, amount of option funds (a nonrefundable payment the buyer makes toward the down payment), length of the lease term, amount of the monthly rent payment, and the amount of the rent payment to be credited toward the purchase.
May explains that since the option funds are not refundable, the tenants must be prequalified for the financing needed to close when the lease-purchase option is drawn up. In addition, they must make sure they will have the funds to close on the specified closing date.
"The greater the option funds payment, the more serious a tenant is about buying when the lease expires," he says.
Although an offer of a minimal deposit is best discarded, an offer for incremental deposits should be considered. The seller could, in turn, apply the option funds collected toward a lease-purchase option of his own, if he is financially incapable of buying until his tenant exercises the option to buy. In addition, while the home is leased, the rent collected by the seller covers the monthly mortgage payment on the unsold home.
"A major benefit for both buyers and sellers is that a lease-purchase option allows immediate occupancy for prospective buyers who would otherwise not be buying the seller's home," May says. "This is particularly useful for contracts involving out-of-town buyers."
Since a lease-purchase option does involve the risk that the option will not be exercised, the agreement should require the tenant to notify the seller of his intentions within 30 to 60 days before the lease expires. Then, the seller can begin marketing the property before the lease expires should the tenant decide not to buy. However, payment of the non-refundable option funds, plus the rent credit, does give the tenant a strong incentive to purchase the property.
Since the seller is providing financing terms to assist the buyer, the buyer often is more willing to pay a higher sales price, according to May. "Buyers seem to understand the concept of trading price for time and rent credit, which can make it easier for the seller to get the best possible price," he says.