The Concept of Rent to Own: LEASE OPTIONS

Today, I thought of writing on lease options, the concept of renting to own. A close friend of mine asked me about this potential pathway to home ownership, and after giving it some thought, I started to wonder if there are “real” deals out there right now where a seller can rent out a property and offer an option to the tenant to buy it, after a set number of months. Renting to own looks enticing, especially to those who can’t qualify for a home loan just yet; with tightening financing guidelines, the idea of renting for two years can buy a potential buyer some time until his/her finances are in place.

What are the features of a lease option? Here are some of them:

• The lease option contract, to be enforceable, must first be in writing
• The contract price for the property is set at the beginning, thereby, locking the price at the time of signing. Two contracts involved, the lease option contract and the Residential Purchase Agreement ( C.A.R- California Association of Realtors’ publication)
• The lease option contract determines the rental amount, the duration of the rental period, and the time when the option to purchase the property should be exercised by the tenant/buyer. These contractual elements are always negotiable between the two parties
• Buyer/tenant pays the landlord/seller an option money, much more like a security deposit, for the right to later purchase the property. This option money is usually non-refundable, whether the tenant/buyer exercises his right to purchase the property later, or not at all. This could be refundable, though, if specified under the terms of the contract.
• The rental money paid monthly does not form part of the purchase price, but if agreed by both parties, can be applied to the total amount negotiated.

So, if you are the landlord/seller, what’s in it for you?

Giving out a lease option will definitely attract not only your average renter, but, a serious buyer who is saving up money and getting his/her FICO scores into the 700 range so that he could obtain the best mortgage rate. Any tenant under a lease option will mostly stay because if they walk out, the option money walks away from them, too. These tenants will surely take care of your property since they have a vision of owning it anyway. Maintenance and vacancy issues are kept to a minimum, that’s for sure. Should the tenant/buyer decide not to exercise the option after the lease term expires, you keep the option money and move on to the next buyer/tenant. Lease options are actually one of the most used investing strategies employed by seasoned investors owning multiple properties.

If you are the tenant/buyer, what’s in it for you?

Under a lease option, no one but you has the right to purchase the property, after your lease term expires. You will be motivated to keep your finances intact because if you don’t exercise the option, you will just throw your option money away. Following the years after signing a lease option contract, you will be more responsible financially speaking, because of a future potential loss of money.

This market maybe tough for any ‘ regular’ seller to move his/her property given the number of short sales and bank owned properties out there right now. In the same way, strict financing guidelines are discouraging first time homebuyers from pursuing home ownership. The meeting of a motivated seller and a potential buyer on a piece of contract called lease option might just as well be the answer.

To answer the question I posed earlier if there are real, legitimate lease option deals out there right now in these challenging times, yes, there should be good ones, no matter how few.