Home Buying in Napa>Question Details

Sarah, Home Buyer in Napa, CA

How do I go about buying a home with a lease option?

Asked by Sarah, Napa, CA Thu Aug 28, 2008

Not quite sure who would help me to find a seller. I have bad credit, but a large down payment (about 1/3 of the purchase price) I need something in Napa.

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Hi Sarah,

Lease Options are a good idea for the buyer in a normal market where prices are holding steady or showing a normal/conservative rate of value growth and are a great idea (if you can get them) in a market where prices are rapidly escalating. However, in a slowing or declining market they are not a good idea for a buyer at all.

Here's why, a Lease Option functions like a sale contract with an excessively long contingency period. In a sale contract time essentially stops at the moment the contract is written and agreed to by all parties involved. What I mean is that the price to be paid for the home is frozen so if homes in the area shoot up in value the lower price is locked in but if they decline then a higher price is locked in as well.

Also, in order for the Option to be a legal and binding contract some form of consideration must be exchanged, usually that is cash. And, usually a portion of the rent being paid is earmarked to be part of the down payment for the home as well. But, if the person who has the Option at the end of the Option period decides not to exercise their option to purchase the property or can't exercise their option because they are still unable to get a loan (either owing to their credit situation or to the homes inability to appraise for the value necessary to support the loan amount - a very real possibility in a declining market) then the monies paid to create the option and toward the potential down payment are kept by the seller and the buyer gets nothing back.

My advice would be to save your money right now and work on improving your credit. A good lender will be able to help advise you on what you need to do and how to do it to start that process. You may also find that even with your current credit situation you may be able to qualify for an FHA loan (their credit guidelines go pretty low) and that would be a much better idea. If you are going to become a homeowner then I think you should get all the benefits of home ownership including the tax benefits (something that the Lease Option won't give you) and not just the liabilities.

Homes will still be available in six months to a year from now when you are in a better position to purchase one. And by rebuilding your credit you will be much better off than you would be if you sink all your cash into a property with no guarantee that you will actually be able to own it and still have not learned how to manage your credit.

And if you do decide to continue to pursue a Lease Option don't make a move on a property without being represented by a Realtor. You need to have the home in question researched to make sure that at the time you are entering into the contract their are no liens or loans against the property that you are unaware of and that the mortgage is being paid so that the home does not get foreclosed upon out from under you. You also need to make sure that written into your contract is a protection for you and your money that ensures that you will get your Option money (not the rent part but the initial deposit and any overage that is supposed to go toward the down payment) back should the seller default or for any reason be unable to deliver the home with clear title and no liens at the time the option comes due , or if at any time during the option period the home goes into preforeclosure by having a Notice of Default filed against it.

Good luck with your situation.

Take care and have a great day!

Tisza Major-Posner, Realtor, IVPG Realty
Web Reference: http://Route66Living.com
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