The Ins And Outs of Lease to Own
While it is the desire of many of us to be able to own our own properties, there are many financial realities that may stand in the way of that desire. When a potential buyer is not in a financial position to purchase a property, a lease to own situation may be the most appropriate arrangement to pursue. A lease to own arrangement may benefit those potential buyers that:
- At present time do not have the adequate amount of cash on hand to put down on the property they wish to purchase.
- Do not have a good enough credit standing to currently be considered for a mortgage.
In both of these situations a lease to purchase arrangement can greatly benefit a buyer, offering the gift of time time in which to save the money necessary to purchase the property, or time in which to improve their credit standing so that they may be considered for a mortgage loan.
What is a Lease to Own Arrangement?
A lease to own is a contractual arrangement between the owner of a property and the potential buyer of the property who desires to ultimately take ownership of the home but does not have the means to do so at present time. In a lease to own arrangement, the potential buyer essentially rents the property with the option to purchase it within a well defined period of time; this option period is often determined by the seller of the property but can be negotiated. The purchase price of the home is also determined at the onset of the option period a price that is determined by the homes market value but can also be negotiated as it is in the typical home buying transaction.
Who does a Lease to Own Arrangement Benefit?
The answer to this question is essentially both parties the buyer and the seller. The buyer who may be in a precarious financial situation, or wishes to purchase a home that may be currently out of their normal qualification boundaries, may do well with a lease to purchase arrangement. Most notably, a lease to own arrangement gives the buyer a chance to get back on solid financial footing while beginning their tenure in the home they will eventually purchase. During this option period, the buyer can begin the process of saving money or working to increase their credit score appropriately.
It should be noted that there are fees involved in a lease to purchase that are over and above the rent that the prospective buyer pays to the homeowner on a monthly basis. One is known as an option fee and it is generally a small percentage (often 5% or lower) of the sale price assigned to the home. The other is a referred to as a rent premium. Both the option fee and the rent premium are applied towards the purchase price of the home. At the end of the option period if the buyer chooses not to purchase the home or is still unable to do so they lose the fees they have paid. But if the sale goes through as planned, the buyer will have been making headway towards their purchase throughout the entire option period.
The seller, of course, that is in a position to hold on to the property for a time, receives benefits from collecting at least a part of the purchase price upfront through the option fee and rent premium paid by the potential buyer as well as the monthly rent. Additionally a point that is exceedingly important in times of a soft real estate market sellers can better achieve the goal of selling their home for its true worth through a lease to own arrangement.
Whether a buyer or seller in a lease to purchase arrangement, it is essential to work with a lender, such as Strategic Lending, that is knowledgeable and experienced in handling the myriad details associated with a lease to own.