Leasing with the Option to Buy

Real Estate

Leasing with the Option to Buy

Leasing with an option to buy is when a renting tenant signs an agreement with a landlord stating that the tenant can buy the property at the end of a prearranged time period. The owner is obligated to sell at the option price, but the tenant is not obligated to buy. The tenant can buy the property only if the landlord exercises the option.

The lease agreement should have a clause that terminates the option to buy if the tenant in any way violates the lease or gets evicted before closing the agreement to purchase.

Usually, purchase price is set out in the original lease-option agreement – in other words, the purchase price is set according to today’s market, not in the future when the option may be exercised.

An option to buy doesn’t give the tenant legal title to the real estate. The tenant becomes a purchaser only upon exercise of the option, at which time the landlord-tenant relationship ceases and the option becomes an absolute and binding contract of sale.

A unique feature of the lease-option is the rent credit. The tenant usually pays above-market rent for the property, but a (nonrefundable) portion is credited toward the purchase price if the buyer decides to exercise the purchase option.

As a TENANT, When is Renting with the Option to Buy a GOOD IDEA?

Maybe you are CREDIT WORTHY for a mortgage but a little short on down payment or closing costs. In this case, a portion of the rent can be credited back to you when you exercise the OPTION.

Maybe the home needs a little work that may take a little extra time to complete that may hinder the type of financing you are approved for. You as the tenant are handy and capable and with the landlord's permission may do the repairs while renting and then exercise your OPTION.

Maybe your credit score is high enough to get a mortgage but not high enough to get the preferred mortgage terms and conditions. In this case, if you are diligent during the rental period, you may qualify for better terms and conditions at the time of exercising the OPTION. 

Maybe you own another property that you intend to sell but do not want to lose THIS particular property. While selling your existing home, a rent with option may be ideal if you are able to afford both payments.

MYTHS DISPELLED

Home owners are not likely to enter into a lease with option agreement with a tenant that is not already qualified for a mortgage reasonably close to the projected selling price.

Home owners are not likely to enter into a lease with option agreement with a tenant for more than a few years at the most. Typically it is 1 - 2 years as market conditions can change dramatically and therefore setting a price today for a sale 2 years from now may result in the price being either too high for the market and therefore challenging the ability to get a mortgage OR, the value may improve greatly in which the landlord may egret setting the price to the lower value from years prior. There are ways around this which we will gladly explain if you email us your questions. info@ClaytonPropertyGroup.com