I’ve just been reading about something I had never heard of before.
It’s called a “lease-option”.
A lease-option is “an agreement between a buyer and a seller that allows the buyer to lock in the future purchase price, save money for a down payment and buy the property in the future at current prices.” It can be a win-win situation.
This shouldn’t be confused with a “lease-to-own” or “lease-purchase”. With those, you are obligated to buy, at the end of the lease term. With the “lease-option”, you have the option of buying the property, at the end of the lease term.
How does it work?
Bob Bruss explains:
A lease-option is a combination real estate rental, sales and finance technique. It is a property lease for a fixed time period, such as 12 or 24 months, with an option for the tenant to buy the property at an agreed option price during the lease term.
Buyers like lease-options because little up-front cash is required. Sellers also like lease-options because they provide necessary cash flow to pay the mortgage and property taxes from a tenant who has a vested interest in treating the property well and who is likely to buy it.
Other benefits to the buyer:
* Small Amount of Up-Front Cash Required
* Monthly Rent Credit Builds a Down Payment
* Try Out the Property Before Buying
* Control Property With Very Little Cash
* Longer Terms Mean Greater Profitability
Usually, the tenant-buyer pays more, each month, than what the rent would typically be. The extra cash is set aside, toward the purchasep price.
At the end of the lease, the buyer has two choices. He can exercise the option to purchase, and buy the home, at the pre-determined price. The buyer would do this if, for example, prices had risen from when the lease began.
Or, the buyer can walk away. The buyer would do this if, for example, prices had fallen from when the lease began. The buyer could renegotiate the purchase price, if he wanted to. The buyer loses any money he has paid during the term of the lease, but presumably lower home prices elsewhere will compensate for the lost money.
I’m not sure this sort of thing would work for everyone. Worth thinking about, if you are concerned prices are going to drop further, but you want to buy a home, now.
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Updated: January 2018