Mar 05 2021

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Tags: rent to buy  lease to buy  lease option  rent to own 

Lease With An Option To Buy
Leasing A Home With The Option To Buy Later

If you're planning on becoming a first time home owner, there are some checkpoints you'll first need to pass, before you officially become the new, legal home owner. One such hurdle would be having a good credit score, which would put you in good standing to obtain a home loan or mortgage to finance the purchase of your dream home. You would also need to secure enough capital to serve as a down payment on your property, including all the other deposits and legal fees involved.

For some, buying a home may seem out of reach. However, there are alternative options, when a seller may consider renting with an option to buy at a later time. This may be a perfect opportunity for you, as the renter, as it will give you the time needed to get your finances in order, such as obtaining a mortgage, improving your credit score and securing a down payment.

How Does Renting With An Option To Buy Work?

The buyer and seller will first agree to the conditions of the contract. Here are the most important factors that will be negotiated and agreed upon in your lease option agreement.

1. The Purchase Price:

The buyer and seller will agree on a purchase price, which locks the buyer in at the agreed upon price. Because of this, the purchase price can sometimes be higher than the actual market value price. This is the preferred method for buyers, especially when market prices are trending up.

However, if property prices decline during the duration of the lease option period, the buyer may find that the price agreed upon is higher than the current market value. However the renter may still decide not to go ahead with the purchase.

2. The Duration of the Lease:

The length of the lease option agreement is agreed to between the buyer and seller, which is usually 2 or 3 years, but can be shorter or longer, depending on the agreement. This must be stated in your lease contract and you should make sure that you are signing a Lease Option Contract, with an option to buy.

3. Non-Refundable Option Fee:

The Option Fee is a non-refundable, upfront fee that is paid to the landlord or seller, which gives the lessee the option to purchase the property in the future, before the lease option contract expires. This fee is negotiable and is usually between 1-5% of the purchase price. However, should the renter decide not to purchase at the end of the lease option agreement, then they will forfeit this fee.

4. Rent to Own Home Maintenance:

As the renter, you are usually expected to provide basic, on-going maintenance to the property for the duration of your lease. This would include basic upkeep of the property, such as trimming of the lawns, gardening, cleaning of gutters, swimming pool and replacing of faulty light bulbs. Major repairs and maintenance, such as plumbing, wall dampness, repairs to the roof, windows and doors is usually the owner's responsibility. However, it is advisable to read your Lease Contract Agreement carefully, to learn what is expected of you. If you are unsure, you should ask your attorney to explain this, before you sign.

5. Rental Payments:

The tenant will pay monthly rental installments to the landlord, just as they would do, if they were renting any other property. In some cases, the landlord may agree that rental installments paid or portion thereof is deductible from the purchase price.

This gives the buyer an invested incentive to not only look after and maintain the property, but to also buy the property at the end of the lease. However, since every lease contract differs, it is best to be clear about this with your landlord, before signing.

After the Lease Option Expires

When the lease option agreement term expires, the renter will have the option of purchasing the property. If you have signed the Lease Option Agreement, then you are not obligated to purchase the property and you can simply choose to walk away. However, you will forfeit all rental monies paid, as well as the non-refundable option fee.

You may, however be obligated to purchase the property, if you have signed a Lease Purchase Agreement, so it is advisable to be sure which lease agreement you are signing beforehand.

In most cases, the tenant decides to purchase the property, in which case they will need to organize a mortgage, home loan or other financing to pay the outstanding monies to the seller.

Looking for a house to buy in Gonubie? We may have what you're looking for!

Summary:

Renting with an option to buy is certainly an attractive option to many tenants and first time home owners. It is an optimistic approach for many to get into the property market for the first time. Renters can 'test' their new home and neighborhood first, before fully committing to a purchase.

This also gives them time to improve their credit score, secure a mortgage and deposit needed to make the final purchase, when the lease option expires. It is also advantageous for the landlord, because the tenant is essentially investing in his or her property, which makes them much more likely to look after and maintain the property, than a renter with little interest in ever purchasing.

Related Article: What You Should Know Before Signing a Lease Agreement

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