Tuesday, April 15, 2008

So what is a real lease option?

I was out showing rental houses today to a client who is moving to the area from Pennsylvania. Last week he had the whole family out and I showed them around different areas and tried to give them a feel of neighborhoods. They are truly a great group of people and I really want to do whatever I can to help them.
As we were viewing rental properties tonight - it seemed like almost every one was listed For Sale, For Rent, Lease Option or Rent with Option to Buy/Rent to Own. Because of the market slowdown - many sellers are willing to do whatever they can to work out a deal with someone who is interested in their house. That's good news for buyers - it is now a Buyers Market. But just because the owner says they are giving you an opportunity to own- doesn't mean it is a good opportunity.
People often tell me they are interested in a Rent to Own situation but the term has been thrown around so much that the original context has been lost. Many landlords will say "Rent to Own" or "Rent with an Option to buy". When all they mean is - you can rent the house - and if you decide to buy it, you are more than welcome to. This is not a true Lease Option/Rent to Own situation.

RENT TO OWN - in a typical rent to own situation, the landlord is going to give you a credit each month for part of your rent payment. Say $200.00. Over the course of a year, you will accrue a credit of $2,400. This credit can then be used as a down payment or to pay for closing costs. This will depend a great deal on what the lender will allow. The lender usually wants to see that you are paying above market rent - thus making it a legitamate pre-payment of funds towards the purchase of the home. You may be able to just have the seller pay your closing costs - but then, in todays market - you will probably need some sort of downpayment.

LEASE OPTION - in a lease option you are purchasing an "Option" to buy a property at a future date. Typically, a buyer will give the seller a down payment, say $5,000. This payment is made to purchase the option to buy the home. Usually, you would determine and fix the purchase price at the time you purchase the option. Sometimes you will agree to pay market price at the time of the sale. In todays market, this makes no sense. Values are not going up - they are going down. And "Market Value" is a highly debatable issue. Who determines what the market value is? The seller? That doesn't work. In todays market It makes more sense to wait and see where the value is in a year or two.

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