In today’s tough credit market, investors and home buyers are having a hard time getting affordable financing to put real estate deals together. Therefore, we have been focusing on alternative financing. Financing that could allow you to own a home of your dreams. One technique we like to use is a Lease Purchase Contract. The term “lease purchase” is known by several other names, such as “rent-to-own,” “lease option,” and “lease with the option to buy.” Regardless of the term you may use, the net result is the same; you, the tenant, end up securing your right to purchase at a predetermined price sometime off in the future. The lease option agreement will secure your right to purchase without the obligation to purchase.
How Does A Lease Option Work?
The lease purchase contract combines a lease agreement with an option-to-purchase agreement. The tenant/buyer pays to the landlord/seller a nonrefundable deposit that is applied to the purchase price of the home (not the down payment.) Remember, the option payment is negotiable; there is no “standard formula” used to determine how much an option payment should be. We have found the price of options in Redding or Shasta County to be much lower as compared to transactions in Los Angeles or San Francisco. From our experience, based on the price of homes in Redding, you might pay as little as $500.00 for an option to purchase a house valued at $250,000 or more. Talk about a little bit of money controlling a large amount of money; it doesn’t get much more affordable than that!
As an example of a typical lease option agreement, rent payments are made on a monthly basis with a portion of that payment applied to the purchase price of the home. During the term of the lease option, but before the option expires, the tenant/buyer has the exclusive right to lease and buy the home under the terms to which both parties have previously agreed. The seller cannot change their mind, raise the sales price, or further encumber the property. You, the tenant/buyer also known as the “optionee” owns the exclusive right to purchase.
What Paperwork Is Needed For A Lease Option?
There are three parts to the lease option agreement, the lease, option to buy, and the purchase agreements. The lease agreement spells out the terms of the lease. The option agreement will state the option price and the terms of the option agreement such as the specific date the option expires and the requirements of exercising the option to purchase. If a portion of the monthly rent is being applied to the purchase price of the home it should be stated in option agreement as well. The Purchase Agreement covers the escrow instructions and timelines of contingencies.