What is Rent to Own/Lease Purchase?
Rent to own or lease purchase option is for someone who can't obtain a traditional loan, usually because of credit issues. Lease purchase properties these days are fewer and far between compared to just a few years back when the housing market was in the toilet. However, there are still sellers out there that are willing to go this route. These agreements vary and can be complicated so you should always work with a trusted real estate professional before entering into such an agreement.
A lease purchase or lease option is an agreement between a lessee/buyer and a seller/lessor to agree to lease a property for a certain amount of time, usually approximately three years or less, for pre-determined monthly amount. Sounds a lot like renting right? Well, there is one important distinction. In a lease purchase the buyer must pay an option fee, generally 1% to 5% of the purchase price. This option fee is non-refundable and is credited towards the purchase price. There can also be an additional down payment along with the agreed upon monthly payment which can also be applied towards purchase price, but again, non-refundable. The option period gives the buyer time to fix any credit issues and save money for closing costs related to conventional, FHA or VA loans.
The Downside
There are some downsides to these types of arrangements. If, for whatever reason, a buyer can not obtain financing at the end of the option period, they could end up loosing the option money, down payment and rent. In some contracts, the seller has the right to give you the boot if you can not live up to your end of the deal and keep every penny that you invested in this agreement. Some agreements stipulate the right for the seller to evict after just one day late on agreed upon rent. Yes, one day! It is important to read and understand the entire contract. A buyer could walk away from the option and loose thousands of dollars. That's thousands of dollars that could have gone towards closing costs related to a conventional loan. See where I'm going here?
Your Best Bet
Your best bet is to first talk to a licensed Realtor® to discuss your options. Lease purchases are out there but you will need to find someone who is experienced and is able to paint a clear picture about what the agreement really means.
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