Lease With Option to Buy condo or home

"Rent-to-Own" seems like a clever way to purchase a Long Beach condo or home these days. But potential buyers should be careful. These lease-with-an-option-to-buy arrangements are not quite as easy and clear cut as they may seem.

What a Lease-Option Is

First, a definition. What is commonly called a Lease-Option can be defined as an owner's offer to lease a home or condo to a renter while giving the renter an option to purchase the property at a specific date in the future. The agreed upon purchase price is written into the Lease-Option agreement. ("Rent-to-Own" is the same thing as a Lease Option home purchase.)

Normally, a renter is required to make a non-refundable option deposit on the condo or home at the time the initial agreement is signed. For example, an owner may ask for $12,000 for the option and set a date of one year at which time the renter can choose to purchase the home with a mortgage loan. During that one year period the renter also makes monthly rental payments.

What is the purpose of the deposit? The owner wants to be certain the renter is serious about buying the house or condo. And the owner wants some financial protection during that period.

Now here is where the details begin to make a big difference, especially in today's estate market. Here is why:

Some Risks of Leasing with an Option to Buy

1. For a potential buyer the biggest risk is that the owner stops making mortgage payments during that one year period and the house goes into foreclosure. If the owner does not tell the renter about the foreclosure, that renter may find himself with an useless option and the option money gone.

2. In the event that there is no foreclosure and the renter goes ahead with the purchase, the deposit may or may not be applied to the purchase of the home. And all or part of the rental payments may or may not be applied to the purchase. These items should be clearly indicated in the initial Lease-Option contract.

3. Another risk these days is that when the time comes to buy the condo or house, the comps or appraisals showing the value of the house may end up being lower--instead of higher--than the price specified in the Lease-Option contract.. The renter/potential buyer may have to try to get the owner to reduce the price at this point.

4. If the renter/prospective buyer decides not to take the Option of buying the house at the end of one year, the option deposit is forfeited to the owner. The renter will also have to move out of the home, unless the owner decides to keep the property as an investment.

5. The renter/potential buyer may also discover that banks have changed their requirements for mortgage loans. Today banks commonly require 20% to 40% down payment and a very, very high credit score to get a real estate loan. Also be aware that banks are now seeking out the lowest appraisals they can find from appraisers. They often get multiple appraisals--looking for the lowest.

6. It is absolutely essential to have professional advice if you decide to go down the road to home purchase using a Lease-Option contract. Have a real estate attorney or reliable experienced real estate broker advise you and explain in detail every single clause in the contract--before you sign it.

7. And remember--you can negotiate everything in real estate. What may have been customary in rent-to-own deals is now open to negotiation.

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