The cons are that the purchase price is agreed to in the deal well before the purchase is made. True market value may differ substantially from the price agreed to in that deal. That is one reason why the purchase is optional, and not binding. If the Lessee decides the price doesn't make sense, they don't have to proceed. However, to counter lessees from walking away for a frivolous reason, most lease-purchase deals include some amount of money that is non-refundable if the option is not exercised. Because of that, I don't recommend people entering into a lease option, unless the pro about needing to get relocated NOW, but needing to delay the purchase due to a sale or other settlement, is the #1 reason a lease option is being considered, and the lessee feels strongly they will be able to perform the purchase during the option period.
In summary, I don't believe a lease purchase option is the best way to make a real estate purchase for most people. It has its uses, and when it fits, it's a great fit. But for the majority of people that enter into a lease purchase deal do so because of credit issues that are prohibiting them from qualifying. They lease now, to purchase later, believing their credit will be better in the future. Then when it doesn't improve in the future, they again fail to qualify, fail to exercises their option, and the non-refundable money is kept by the landlord/home owner, creating a sadder situation, which probably doesn't help their credit.
A Lease Purchase has as its core the "purchase contract" with a provision it be "excersized" as an option at the conclusion of the lease term. The contract is pretty much negociated, price , down payment, pretty much a done deal and then you have the "option" of excersizing the contract.
In this market it would be absolute lunacy to enter into a contract with a price set at today's values. Belive me, there are going to be many, many homes available in a year for you to purchase wtihout entering into any form of lease/option or purchase arrangement.
In our market we see many forclosured upon properties owned by investors with the sign out front of the property saying, "No Credit, Bad Credit? Rent to own!" or words to that effect. Here's the scam:
You enter into a "Lease Option" agreement with these sharks, they stick you with rent sometimes 100% over market and state they'll give you 50% of your rent back in a downpayment in one year. They say they'll give you a heckuva deal when you go to buy it! You fall for the idea of a big downpayment inherent in your rent but with your "no credit or bad credit" they know darn well you'll NEVER qualify for the price they are going to ask therefore giving them excessive rent for the year at YOUR expense!! Also, even if you wish to pay-down some credit cards or try any type of savings account, they have you roped into this excessive rent which keeps you chained to the property. Either way their ethics suck! Beware of these Schmucks!
If you are not ready to purchase today, instead of entering into a lease/option, you might find a rental with a first right of refusal to purchase. This would keep your alternatives open without tying up or risking your cash. If your local market is a buyers market, chances are there will still be inventory levels that will provide ample choice for the next year or so. Chances are prices will still be very attractive for buyers.
There are a few circumstances when a lease/option or lease/purchase may be worth entertaining. In most cases, I donâ€™t recommend it. If you do pursue this route, keep your cash option money to a minimum.
I don't like lease-purchases as a general rule, even more so with good credit. In my experience, the properties that offer this option are often not the properties you want to buy. Sellers with a quality property who are actually interested in selling, will do so outright. I have recently seen a few listings in the red-brick neighborhoods (Scottsdale Estates) that are listed at prices not seen for single-family residences in the last few years (mid 200s). There are plenty of values in South Scottsdale right now without having to go the lease-purchase route. I do a lot of business in the area (I live near Hayden & Lincoln) and have an active listing in South Scottsdale, so please feel free to drop me an email or visit my site if I can be of assistance.
If your credit is good, why are you not looking to purchase? Interest rates are low and prices are now affordable. I know of some great first time homebuyer financing programs, let me know if you are interested.
There is no "black or white" answer with this questions because of so many variables with lease purchase properties.
True options cost money. However, if with the help of a professional Realtor, you can enjoy several benefits. One being to set the price now for a future purchase. Or having some of the rent go toward the purchase price, "buying-down" the future purchase price.
Consult with a local professional to enjoy the whole picture.