I recently had a client ask me about homeownership through a lease with option to purchase arrangement.
This can happen with properties that a landlord has listed for rent and for sale at the same time.
A rent amount is determined and agreed upon by all parties. A sales price is agreed upon by all parties.
There is an additional amount on top of rent that is paid by the tenant. The additional money, generally paid over a one- to three-year period, will go toward the purchase of the home.
There are advantages and disadvantages to this arrangement:
Pros : This can be a great opportunity for a tenant to have the ability to purchase a home that he or she has had the chance to live in. It enables you to see if a home has any potential problems. Of course, if you decide to purchase the home, you still should go ahead and get an inspection.]
• You are able to lock in an agreed-upon sale price.
• Part of the rent will go toward the purchase of the home. So you essentially will be investing in yourself rather than solely in your landlord.
• The deal allows you essentially to save what amounts to a down payment over time.
• You get the home you want without having the risk of possibly losing it in a multiple-bid situation.
• In a market like the current one, with increasing value and properties that typically sell for higher than list price with multiple offers, it is quite likely that you will be paying a lower price than if the property was listed for sale.
Cons: It’s hard to get lease-to-purchase deals these days. In a seller’s market like that in the Washington area, owners may be more inclined to put the property on the market now rather than wait to sell it to a tenant sometime in the future. Also, with the likelihood of getting multiple offers above the asking price, an owner may be more interested in listing the property on the open market rather than making a deal with one tenant.
• You need to be serious about the deal. If you change your mind, you will lose the extra money you were paying to buy the property. If you are considering lease-to-purchase, you have to be okay with knowing that if you decide not to buy at the end of the lease term, you will not get that money back.
• If you are getting a mortgage to finance the purchase of the home, you don’t know what the interest rates will be at the end of the term of your lease. They may be higher, which could affect your ability to afford the home.
If you’re considering this arrangement, ask a real estate lawyer or agent to review the contract and represent you in the process. You will need a real estate agent’s help to look at the comparable sales in the area and to negotiate the best price and terms possible. In this market, typically the seller will pay the commission to the real estate brokerage of the agent who represents the buyer at settlement.
The renter gets the benefit of an agent working on his or her behalf.
A real estate lawyer will be able to see a renter through the contractual part of the lease with option to purchase. A real estate lawyer will charge for a renter’s time, but the investment may save you in the long run from entering a bad deal.