What is a lease option?

Answer No. 1
A lease option (more formally Lease with the Option to Purchase) is a type of contract used in both residential and commercial real estate. In a lease-option, a tenant and property owner agree that, at the end of a specified rental period for a given property, the renter has the option to purchase the property. It is different from a lease purchase contract, in that a lease-option the buyer has the option but the seller does not, whereas lease purchase binds both the parties to the sale. The contract is typically between two parties- the tenant, and the landlord, who owns or has the right to lease or dispose of the property. The basic elements of a lease-option are:

  1. Buyer purchases the option
  2. The parties agree to a purchase price.
  3. The length in residential real estate is typically 1-3 years.
  4. An investor may acquire a distressed property with a lease option and make improvements to the property.
  5. How much the monthly lease payment is, whether any of the lease payment is to be credited towards the purchase price reducing the purchase amount?

As an example – Seller has a property that needs a considerable amount of work. Retail buyers typically cannot get financing or have too much to choose from to bother with physically distressed properties. The investor enters into a lease option agreement for let’s say $200,000, rehabs the property with about $30,000 and now, the market value is approximate $235,000 the investor can sell the right to purchase for $55,000 and the new buyer would close with the original seller for $150,000.

Answer No. 2
A lease option is an agreement that gives a renter the choice to purchase a property at the end or during the rental period. As long as the lease option period is in effect, the seller/landlord cannot offer the property for sale to anybody. When the term expires, the renter must either forfeit or exercise the purchase option. It gives a potential buyer/renter more flexibility than a lease-purchase agreement. In lease purchase agreement it requires the renter to purchase the property at the end of the rental period. There are many reasons for using lease options for both buyers and sellers as –

As a Buyers=

A Buyer may need to sell a property in another area before the buyer can qualify to purchase the new home.

During the option period, a buyer may have had some credit issues that can be resolved.

A Buyer may have started a new venture and otherwise qualifies and can afford the payments.

A Buyer may not have enough funds for a down payment so lease option is a good option.

A Buyer is relocating and is unfamiliar with the new area. He wants to “get a feel” for the area safety, school quality, convenience, etc.

A Buyer is seeking a VA loan and the property does not meet VA appraisal guidelines.

As a Seller =

It allows the seller to sell a property that they may not have otherwise been able to sell.

There is an expression;” Price or terms, pick one seller” may be able to sell for a better price. For the buyer to get a favorable price the terms usually have to favor the seller.

Answer No. 3
Lease option=

If you are ready to buy the home of your dreams, but your credit or savings isn’t quite ready yet, a lease with option to buy may help you move in.

Lease option, in which you rent a property and have the option to purchase the property at the end of the term, allow you to control a home that you want even if you don’t have enough money for a down payment yet. It may also be needful if you need some time to improve your credit before you can get a good mortgage rate. There are simple steps to follow –

  1. Determine if a lease option is a good option for you.
  2. Find a house you want to buy.
  3. Discuss the lease option with the owner.
  4. Get a home inspection.
  5. Negotiate the terms of the lease option.
  6. Pay an option fee and sign the contract.
  7. Check on your insurance needs.
  8. Make monthly payments.
  9. Make improvements on the home.
  10. Apply for a loan.
  11. Purchase the home on the lease.

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