Friday, July 14, 2017 / by Joe Corbisiero
With a lease option, there are only a couple of required elements, and everything else is negotiable between the individual tenant/buyer and landlord/seller. The way it works is that the tenant leases the home from the landlord. The lease agreement sets up a certain rental rate, and a certain lease term. The agreement also expressly gives the tenant the right, or "option," to purchase the property on or after a certain date, at a certain price.
Just about everything else is negotiable. Sometimes, the buyer pays an "option fee" at the time she enters into the agreement, which is thought to compensate the landlord for the privilege of giving the tenant the option to buy the home for however long (holding the place off the market, and forgoing other prospective buyers who might come along during that time). On today's market, though, many lease options are negotiated to include only the normal security deposit.
Sometimes, the rental rate will be set at a premium, meaning some amount higher than what the property would have rented for in a normal lease scenario. Often, the above-market portion of the rent is credited toward the buyer's down payment or closing costs if and when they decide to buy. (Note - in these types of arrangements, if the buyer elects not to buy the property, the amount of rent that was intended to go toward the purchase price is usually forfeited to the seller, to compensate the landlord/owner for the option.) Other times, though, when the landlord is motivated to divest of the property, a lease option can be had at a standard rental rate with no credit toward the purchase price at closing.
The best thing about lease-options for sellers: they can provide a great strategy to get a tough-to-sell home off the market, defer capital gains taxes, or otherwise gain a tenant who is highly likely to take great care of your property (because they're likely to think of it as their own home-to-be).
The best thing about lease-options for buyers: there are many, but it's a great way to buy yourself some time to work on your credit or save more money for a down payment. It's also a great hedge against varying prices: you lock in your purchase price now, so if they go up, you're protected. But - it's an option to buy, not a promise to buy, so if prices go down significantly during the term of your lease, you can try to renegotiate your price when it's time to buy.
Make Sure You: If you decide to go the lease-option route, work with either a local real estate broker/agent, who can help you avoid overpaying on either the rental rate or the purchase price, or a local real estate attorney, who can draw up or review your lease option forms for legal sufficiency. (In most states, real estate brokers can also draw up lease-option paperwork.) And no matter who you work with, get a title search done before you sign the papers (to make sure the landlord isn't in foreclosure, or doesn't owe more on the house than you're agreeing to pay) and take steps to record the lease-option with your county or parish recorder's office (so that your interest will be made known to lenders, before they foreclose or make a loan on the property.
You Should: email your pressing real estate questions to Tara-Nicholle Nelson, Trulia's In-house Demystifyer of All Things Real Estate, at tnelson at trulia.com.
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