What Does a Real Estate Lease With an Option to Purchase Mean?
In tough financial times, house sellers begin to look for creative ways to attract buyers and buyers begin searching for unique ways to buy a house. One method that seems to work for many people is lease with an choice to purchase. While there are possible pitfalls with this kind of financing arrangement, they may be avoided with preparation and a well-worded contract.
Benefits
The benefits to a seller would be that he immediately begins to receive income on his house, and if all goes well, he understands that by the end of the contract he will have a house sale. A buyer may benefit by negotiating a sales price he thinks that he will have the ability to take care of. In case he’s credit issues, a lease with an choice to purchase gives him time to clean them up. Due to the way that this arrangement is organised, the buyer also builds equity in the house as he leases it, giving him less to come up with in the time of purchase.
Characteristics
A lease to purchase is an agreement between a landlord and tenant stating that during a particular period of time, the renter has the choice to buy the rented property. The landlord and tenant agree on the sales cost and the length of time the contract will last. The tenant pays the landlord a consideration fee of between 3% and 7 percent of their sales cost in exchange for maintaining the house off the market. They determine how much of their monthly rental will be credited toward an eventual buy, with the average amount being from 30 to 50 percent. In addition, the 2 parties determine who will be liable for ordinary maintenance issues and whether the tenant is required to carry renter’s insurance on his possessions.
Time Frame
The average lease to purchase option lasts three to five years, but the purpose is negotiable. A longer period may be necessary for a renter who wants to repair his charge before attempting to secure a mortgage loan. Generally, the tenant has the right to buy the property at any time during the term of this contract.
Possible
There are potentially serious consequences to the renter that decides not to buy the house or is not able to procure a loan in a timely way. Not only does he lose the whole amount he gave the landlord as a consideration charge but he also loses all of the rental credits which were paid ahead of the loan each month. On the flip side, if the renter does exercise his right to buy the property, 100 percent of their consideration fee he paid at the beginning of the contract and 100 percent of his rental credits will be deducted from the sales price, providing him less to borrow from an outside lender.
Caution
Many landlords do not own their property outright, but instead continue to make monthly mortgage payments as they lease it out. The renter runs the risk of having a landlord who doesn’t make his monthly payments to the mortgage company and who enables the house to enter foreclosure. One remedy for this could be written into the contract. It should say that the tenant will pay the mortgage payment directly to the mortgage company each month, with any lease overages being sent to the landlord. The renter will offer the landlord with evidence he gets paid the mortgage note before its monthly due date.