A lease-option is a combination real estate rental, sales and finance technique. It is a property lease for a fixed time period, typically 24 months, with an option for the tenant to buy the property at an agreed option price during the lease term. Someone with poor credit and not a lot of liquid assets at the time, who can't afford a large down payment, are perfect candidates for this type of program. Buyers like lease-options because little up-front cash is required compared to a typical down payment. Investors also like lease-options because they provide necessary cash flow to pay the mortgage and property taxes from a tenant who has a vested interest in treating the property well, and who is likely to buy it.

Example

Buyer/tenant is looking to buy a home, they have bad to decent credit, and at the time can't afford to put down 10 to 20% down towards the purchase of a home. They have spoken to their real estate agent and have decided they would be interested in a lease with the option to purchase. The buyer/tenant sits down with a real estate agent and possibly a mortgage consultant and figures out exactly how much they can afford per month. They may get pre-qualified for a loan amount based on their current situation to figure out exactly how much house they can afford at the time. Based on that information, the buyer/tenant will work with their real estate agent on finding them their home within that price range.

Depending on the type of home the buyer/tenant wants, they can go in a couple of different directions. First, if the home is a pre-existing home they may set up the lease with option to purchase with the current seller of the home. Although this is uncommon, it could possibly happen. Typically, a third party investor comes in and buys the property for the buyer/tenant (usually a new construction home) and they establish the lease with the option to purchase before the purchase of the target property. The investor becomes the landlord for the set term of the lease with the option to purchase and then sells the property to the buyer at anytime during the lease option period at a set price established at the time of contract. (typically 2 years).

Upon execution of the purchase option, the buyer/tenants real estate agent will draw up the documents to execute the transfer of ownership of the home from the seller to the buyer. The buyer/tenants lease option money and possibly any rent credit will be refunded to them to be used towards any possible down payment and/or closing costs to facilitate the execution of the transfer of ownership. Upon closing, the investor/landlord will receive their money from the investment, and the buyer will obtain ownership of the home.

Should the buyer/tenant decide to not go through with the purchase of the home after the set option period expires, should they default on the lease, or should they be unable to acquire financing, they may lose their option money deposit and any rent credits that may have accumulated during the period of the lease. This is for protection of the investor's investment. The investor/landlord is then free to do whatever he wants with the property at the time of default of the contract. The typical lease deposits (i.e. security deposit, pet deposit etc.) will be treated per the terms of the lease agreement.

Contracts and Agreements

There are two parts to a lease with the option to purchase transaction: the lease, and the purchase contract. The first part is the residential lease. Here in the state of Texas we have a lease contract that is used and has been provided to real estate professionals to use for any property in the state of Texas. This is the most common contract that is used for lease properties within the state of Texas. Rent price will be established on this contract as well as how the lease deposits are handled.

The second part to a lease with the option to purchase is the option to purchase contract. This contract is drawn up by an attorney at the expense of the investor. This contract establishes the guidelines and responsibilities of both sides of the transaction to facilitate the transfer of property from the investor/landlord to the buyer/tenant. Some typical and important guidelines that this contract will lay out are the following:

• » The named parties of the transaction, property address.
• » The term of the option period typically 1 to 2 years.
• » Amount of option money. Usually 2-5 thousand dollars.
• » The purchase price, or whether it will be sold at market value at the time of sale usually completed by a licensed appraiser
• » Whether or not the contract is contingent on loan qualification at time of sale.
• » Contract may be contingent on the buyer/tenant being enrolled in some kind of credit repair program, if needed.
• » Amount of commissions paid at the time of ownership transfer.

Small amount of up-front cash required

The amount of up-front cash required to acquire a home or other property on a lease-option is usually small, often just a few thousand dollars for the first month's rent plus a refundable option consideration. This option money could possibly be used in lieu of a security deposit, but it is rare.

Security

Enjoy long term security with a 2 year lease without worries of rent being increased.

Get the home you want today

Whether it is a home you have already picked out and fell through due to financing, or a new home of your choosing, you can get into the home within 2-3 weeks.

Monthly rent credit builds a down payment

The unique characteristic of a lease-option is the rent credit toward the buyer's down payment. Typically, the rent credit is 5 to 10 percent of the monthly rent, depending on how motivated the seller is to sell.

Try out the property before buying

Another special lease-option benefit for the tenant is the ability to try out the property before buying. If it is undesirable, the tenant hasn't tied up a large amount of cash in the home, and can leave easily.

Control property with very little cash

The ability to control a property and profit from its market value appreciation with very little cash is called leverage. Lease-option buyers have this unique advantage.

Repair credit issues to increase purchasing power

You will be working with a mortgage broker and a credit repair agency to help repair your credit to where it needs to be, to purchase the home back from the sponsoring investor.

This is strictly an informational breakdown to help you understand how a lease with the option to purchase works. Not all transactions are typical, and the terms and conditions can vary per transaction.

An investor purchases a home for the buyer/tenant at the sales price of $140,000, from a builder's inventory.

Buyer/tenant signs a 2-year lease at $1,500 per month.

$100 per month of paid rent will go into an account and will be credited back to the buyer/tenant upon purchase of the property back from the investor. There is a potential return to buyer/tenant of $2,400 to be applied towards the purchase of the subject property.

Start-up Costs:

• Security deposit of $1,500 to secure the lease for 2 years.
• First month's rent of $1,500 due upon move-in into the property.
• Purchase option deposit of $2,000 to be paid at the signing of the lease option agreement.

Should the buyer/tenant go through with the purchase at the 2-year anniversary then all named deposits and rent credits will be credited to the buyer at closing.

Should the buyer/tenant not go through with the purchase at the 2-year anniversary then the buyer may lose the option deposit and any rent credit.

The lease security deposit will be subject to the terms listed in the lease agreement.