Lease Option Helps Families get on the Path to Home Ownership

Lease option is a form of financing used to purchase real estate. Instead of obtaining a mortgage note through traditional lenders, buyers pay sellers 'option money' to secure the right to purchase the property at a later date. The purchase price may be predetermined or the buyer may agree to purchase the home for current market value when the lease option expires.

Since buyers and sellers negotiate their lease option, no two will be the same. When drafting rent-to-own lease agreements it is advisable to work with a qualified real estate attorney. Doing so will ensure the document is legally-binding and adheres to state laws. It is imperative both buyer and seller are protected by law in case either party defaults on the contract.

Rent-to-own real estate can be particularly beneficial to credit-challenged buyers. Most lease agreements are in place for one to five years. This allows buyers to remove blemishes from their credit report and provide proof of timely payments. When drafting lease options, buyers should request sellers report their payment history to the three major credit reporting agencies.

Generally, a portion of rent paid during the term of the lease agreement is applied toward the purchase price. Typically, 5- to 25-percent of rental money is applied; however, it can range from zero to 100-percent. While it is rare to find a seller willing to apply 100-percent, it is not impossible. When this occurs, the seller usually requests the buyer pay current market value when the lease option expires.

When rent-to-own agreements are in place, the seller is prohibited from selling the property to anyone else. However, if the buyer defaults on the agreement, the lease option becomes null and void. Most lease options prohibit the buyer from leasing the property without consent from the seller. Both parties are obligated to uphold stipulations outlined in the contract. Prior to signing on the dotted line, both parties should engage in due diligence to ensure they are dealing with reputable people.

Some investors utilize lease options as a way to purchase investment property without obtaining financing. This type of real estate investing can be risky and is better left to professionals. However, it is a creative way to obtain property and turn a quick profit.

In a nutshell, investors sign a lease option with the buyer. A clause is included granting the investor permission to reassign the option to a third party. Here is an example of how it works...

The investor pays the buyer $100 in non-refundable option money. The monthly rent is $1000 with $500 applied to the purchase price. The agreed purchase price is $250,000 and the note expires in three years.

The investor reassigns the note to another buyer. The buyer pays $250 non-refundable option money and $1200 monthly rent with $400 applied to the purchase price. The agreed purchase price is $262,000. Using a 3-year note as an example, the investor will receive:

• $150 profit from option money
• $7200 in monthly rent ($200 x 36 months)
• $3600 applied rent (Investor accrues $18k toward purchase price. Third party buyer accrues $14,400. Capital gain equals $3600)
• $12,000 – profit from sale at end of term
• Total profit = $22,950

These figures are for illustration purposes only, but it is easy to see using lease options for investment purposes can be quite lucrative. This type of transaction requires careful planning and strong negotiating skills, along with the expertise of legal counsel

Tagged: Home Ownership, Lease Option, Lease Options, Mortgage Note, Mortgage Wrap, Seller Carry Back, Wrap Around Mortgage

Published on August 29, 2008 at 06:04 AM