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Are lease options a good idea?

As interest rates remain unsteady and lenders tighten guidelines, there is a general sentiment among buyers that still believe renting is a waste of money; however, they don't have enough of a downpayment to make a purchase. Lease options or "rent to own" homes can provide cash poor buyers a route to homeownership. There is no "standard" lease option so whatever the buyer and seller can agree to is a legitimate agreement but it should be in writing and I recommend it be reviewed by an attorney. Buyer should be cautious as there are many vague areas that you need to make sure you are covered.

The primary benefit of a lease option is that you can build up cash on a monthly basis with the seller. Generally, you can live in the home and make improvements as if it were your own. However, there are many questions that need to be clearly covered in the contract.

- How much of the rent will go towards the down payment?
- How long will it take for you to accumulate the down payment needed to qualify for a mortgage?
- What happen if you don't exercise the option to purchase within the deadline? Can you extend the contract?
- Who will be responsible for routine maintenance and who will pay for repairs?

As a buyer, it's still important to consult a  real estate professional about other items that need to be clearly stated in a contract. I have been advised by an attorney that lease option to purchase agreements should be recorded at the RMC office to protect the buyer.

Best advice is for all parties to hire lawyer to draft an agreement.

For sellers, some important questions include:

1. How do you get paid?
2. What happens if buyers default?
3. What property tax ratio will be used? 4% or 6%?
4. How do you get defaulting buyers out of the home?
5. Is it a landlord tenant relationship or a seller financing arrangement?
6. Do you evict them in magistrate court or will the magistrate refuse to hear it?
7. Will magistrate require the case to go to Master in Equity for foreclosure? (Time and cost way may be increased.)
8. Why do they want to do a lease option?
9. Can the seller afford a defaulting buyer?

Lease options can be a very risky transaction, but it's great if parties both go into it with eyes wide open. Anyone had a good or bad experience? 

Michele Reneau, ABR, GRI, CRS

www.CharlestonRelocationExperts.com

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Comment balloon 4 commentsMichele Reneau • July 08 2008 05:10PM

Comments

I can see how lease options can benefit buyers who do not have enough cash for a downpayment, but how would this be a benefit to sellers?
Posted by Anonymous about 10 years ago

In a slower market, a lease option to purchase will benefit a seller in that you have a "renter" who has a vested interest in the house. A optionee tends to maintain and take care of the home the way an owner would. Additionally, you would have the benefit of covering your mortgage through rent monies, instead of leaving a house vacant for months. Additionally depending on how the lease option is set up, a seller can retain property tax deductions during this time and they can usually charge above fair market value rent since a portion will be credited back to the buyer towards a downpayment.  As days on market stretch longer, this may become a viable option for many sellers.

Posted by Michele Reneau, Realtor, GRI ~ Charleston, SC Relocation Experts Team (Certified Staging Professional (CSP) Elite Instructor) about 10 years ago

Michele, a couple of decades ago, I bought my home on a lease option.  We paid above market rent with about half of it going to the down payment and closing costs when we settled, so the owners didn't really care how long it took us to settle.  If we didn't they kept the extra rent.  We moved in just before Christmas and settled the following June.  I was a new real estate agent with a lot of stuff pending settlement, and as closings took place, it all came together. 

It was a slow market with high interest rates - really high - and while we waited to settle, they came way down. 

My advice to buyers and sellers is that a lease option can be a good way of doing it, as long as you are very careful about how the agreement is structured.

Posted by Patricia Kennedy, Home in the Capital (RLAH Real Estate) about 10 years ago

Thanks for your comment Patricia! I think as the days on market become longer, it will be important to consider.  I think it's important to find out why folks are interested in lease options.  If it's because of credit, it's important to make sure they are working with someone to help them tread those waters. It can be a long road.

Posted by Michele Reneau, Realtor, GRI ~ Charleston, SC Relocation Experts Team (Certified Staging Professional (CSP) Elite Instructor) about 10 years ago

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