What is a Lease Option to Purchase and Why Would a Buyer or Seller want to Engage in this type of Contract?
A lease option to purchase is contract between a prospective buyer and seller whereby the seller agrees to lease the seller's home to a prospective buyer with the option to purchase the home at a given price within a given time period.
Why would someone want to enter into a lease option if they are a seller of a home?
If you are the seller and are unable to get enough money when trying to sell your home the conventional way you might try alternate way to deal with the debt obligation (your asset) owed to the bank. With a lease option because it's flexible and unconventional you as a seller can charge the prospective buyer more rent as well as get a higher price for the home. Typically, with a lease option you'll get "option consideration" which is an amount of money to lock in the prospective buyer's option. Usually sellers will want to get enough option consideration that will cover the home of repairs should the prospective buyer have no desire to purchase and trash the home. Also the rent the prospective buyer will pay will be increased as usually some of the rents they pay may go to the purchase price of the home when the time comes that they can secure financing. You as a seller are doing the buyer a favor by allowing them to live in your home while the buyer is straightening out their affairs with the hope that they will be able to purchase in the future. Some of the reasons why a prospective buyer could not purchase right then might be credit, reportable income, or interest rates. As the buyer is living in the home they could be cleaning up their credit, getting a better job and in the future be ready to purchase. In a down market when real estate is declining it's hard to sell a home on a lease option because by the time the buyer is ready to purchase it may not appraise for what you originally agreed or the buyer may not want to purchase it period because the home is worth so much less. In an up market it's a win win because the seller will get the price they originally wanted and the buyer will have increased equity and value over time and be even more invested in the home.
Why would someone want to enter into a lease option if they are the buyer of a home?
If you are buyer and have issues with credit, income, or temporary problems and want to purchase a home but simply cannot get financing right now you might turn to a lease option. If the market is climbing you will have the ability to lock in the price of the home for a certain period of time such as 12-24 months. If you lock in the home price at $200,000 and in 24 months the home appreciates by 5% per year then it's going to be worth $220,000. That's $20,000 of value in two years that you would not had if you were just renting. Also many times the seller of the home will make it easier for you to purchase the home down the line by offering to give part of rents as downpayment for the home and the option consideration you pay for this contract will in most cases be applied right to your downpayment. This can be a great win-win!
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