What is a Lease Purchase Option?

Today’s housing market will lead many potential homeowners to a lease purchase option transaction because of lender’s tight mortgage guidelines.  The term is synonymous with “rent to own, rent to buy, and lease with an option to buy”

A lease purchase option is a two (2) part agreement between a seller and buyer to (1) lease the seller’s property for a given period of time (usually 1-3 years) while living in the home and making monthly lease payments and  (2) to purchase the property at the end of the agreed upon term period.  Sometimes a portion of the lease payments (known as option money) are being applied towards part of the down payment towards the purchase. 

Usually the Buyer will be required to pay a substantial deposit towards the purchase to retain the right and exercise the option of securing first position to purchase.  If the buyer defaults at the end of the term period by not meeting the required conditions of the agreement, then the deposit/option payment will be forfeited to the Seller.

Why a Lease Purchase Option?

In most cases the reason why buyers turn to this option is due to bad credit or the inability to meet loan approval from a lender due to strict guidelines.  Also, it may be for lack of sufficient down payment or the seller and buyer agree to a sales price above current market values.

Benefits of the Lease Purchase Option for the Buyer

In any event, this may be a viable option for buyers that want to be future homeowners rather than long term tenants. 

The most important benefit to any potential homebuyer is pride and possession of the “American Dream.”  In addition, for most buyers it offers the opportunity to save more money for the down payment , clean up bad credit and sometimes make repairs to the property to the buyers liking.

If possible, the ideal lease purchase option would be to “lock the sales price” so that chances to qualify for a loan are better secured  and uncertainty of an unaffordable price at the end of the term has been finalized..

Benefits of the Lease Purchase Option for the Seller

The seller is motivated to offer this alternative for several reasons:

1)    The house has been on the market for a long period of time and has received no acceptable offers to the seller’s satisfaction.

2)    The seller may have purchased another home and cannot afford to make two mortgage payments

3)    The seller may not want to make repairs to the property but wants above current market value.

Rent to Buy Your House Back is another Option Available to You

It is no doubt that today’s current real estate market is in a topsy turvy position, and Buyers and Sellers will have to create and exercise non-traditional financial  arrangements to move forward.  Otherwise, stagnation will persist and we can undoubtedly expect to see more decline.   

If you are a victim or a potential victim to foreclosure, you may want to consider the rent to buy option that is offered by Citimortgage.  This program was recently introduced to existing homeowners that are or will be foreclosed upon.  Bank of America has also implemented a similar program for their existing customers.

Consider carefully the pros and cons of purchasing with a lease purchase option agreement.  In spite of the many risks to both seller and buyer, this option remains a viable solution to both parties.

What do you think?

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