Buying a Home Using a Lease Option

A lease option is an alternative solution for buying a house. This strategy is often offered through property owners and real estate investors as a way to obtain current market value for their property and to generate positive cash flow throughout the duration of the lease contract.

Entering into a lease option requires careful consideration. Buyers should consult with a lawyer to determine if this type of real estate contract is legal within their state of residence. It is always best to have contracts executed by attorneys. At the very least contracts should be reviewed to ensure they contain appropriate legalese and will hold up in court if necessary.

At minimum, lease purchase option agreements should include the purchase amount, installment payments and due dates, rate of interest, amount of money contributed toward the purchase price, maturity date, and default clause.

Lease-to-own contracts can be the perfect solution for individuals with less than perfect credit or those unable to provide sufficient down payments to qualify for bank financing. Instead, buyers provide ‘option’ money to the seller to secure the property and prevent sellers from placing it on the market.

Contracts are normally in place for a year or two and grant buyers time to rebuild credit. Buyers must strive to improve FICO scores to qualify for bank financing when contracts expire; otherwise they could lose vested funds or be sued for breach of contract.

Dependent on the type of lease agreement, contracts may also include a provision that allows buyers to bow-out of the purchase upon maturity date. Some states hold buyers legally responsible for purchase. Others allow sellers to retain option money and all funds designated for the purchase. Nearly all include a penalty if buyers default on contract terms. Penalties usually require buyers to remit lump sum payment to the seller.

Lease options can provide considerable flexibility as long as they comply with state law. Sellers can either lock-in the purchase price within the contract or require buyers to pay market value when the contract expires.

Once advantage of lease options is they allow buyers to have a portion of monthly rental money contributed toward the purchase price. This amount is usually between 10- and 25-percent, but will vary depending on the seller. If the monthly rent is RM1000 and sellers contribute 25-percent the buyer receives a purchase credit of RM250 per month.

One a lease option has been signed and notarized neither party can sell or rent the home without authorization from the other party. Tenants are prohibited from transferring lease agreements or renting the house to another tenant without written consent from the seller. Property owners are prohibited from selling the house unless tenants default on contract terms and provided with legal notice of default.

Prior to engaging in lease options it is crucial for buyers to engage in due diligence. This should include searching public records to ensure sellers have not entered into foreclosure, as well as obtaining property inspections and appraisals.

Sadly, mortgage fraud is rampant, so it is imperative for buyers to investigate sellers and verify they own the property and have the right to enter into a lease option. Taking time to investigate the seller and property can minimize risks and ensure a smooth transaction.

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