Michelle Vog…, Home Buyer in 13550 n 103rd place

I'm wondering what the pros and cons are with a lease with a purchase option

Asked by Michelle Vogler, 13550 n 103rd place Fri Sep 28, 2007

I am a first time buyer and know my credit is "GOOD"....

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Mike Kelly Allison Norman’s answer
Point of Clarification: We had folks saying "Lease Option" in the same breath as "Lease Purchase". One is simply a lease with the option to get a first right of refusal to purchsae the property at lease conclusion.
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!
1 vote Thank Flag Link Tue Nov 6, 2007
One pro to a lease option is that the purchase price is usually agreed to at the time of lease inception. In a market where prices are increasing this price could be better than true market value in the future. Another potentially more important pro, is that the future home owner gets the advantage of living in the property they plan to own before they are capable of making the actual purchase. This can be a big advantage for people that have a property currently listed for sale, but they need to move into the new home before that property closes escrow.

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.
Web Reference: http://blog.101bell.com
1 vote Thank Flag Link Fri Sep 28, 2007
great response. well stated.
Flag Mon Nov 25, 2013
These are detailed contracts and a lot of risk put up with non-refundable deposit money. Most real estate brokers won't let them through the door. There is a lease agreement attached to a purchase contract and depending on how the contingencies are written and what is agreed upon for execution dates really makes for quite a possible debacle. Typically there will be non-refundable money involved and this is never good when it is lost for non-performance issues. Too many moving parts to write down here, so please consult a broker/agent that has excellent experience on this creative way to buy property. It certainly has it's place, but I've found that it should be used much less than it is and I personally know of 2 families in my career that have lost a significant non-refundable deposit in a lease purchase scenario. Good credit? I wouldn't even dream of a lease purchase unless it was a risk free, no lose agreement that totally benefited you personally in every direction. Good hunting!
0 votes Thank Flag Link Sun Nov 24, 2013
Only you know your true financial situation. If you have good credit and could possibly purchase don't waste a good opportunity during this time. Make a decision and either rent or buy.
0 votes Thank Flag Link Fri Mar 11, 2011
I've never been a big fan of lease purchases. I think you either lease or purchase and not both. What if you put up non refundable money and find out later that you really don't like the home or it has defects. I think you just lease and buy when you are ready or able.
Web Reference: http://getprequalified.com
0 votes Thank Flag Link Tue Nov 6, 2007
The caution that I have for buyers in a lease/option rests with the option money paid to the seller that could be lost if the transaction does not result in a sale. Those funds are at risk if you do not follow through with the purchase. What if the property has a cloud on the title? What if something changes on your end?

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 don’t recommend it. If you do pursue this route, keep your cash option money to a minimum.
0 votes Thank Flag Link Fri Sep 28, 2007
Deborah Madey, Real Estate Pro in Brick, NJ
Hi Michelle,

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.
Web Reference: http://rayandpaul.com
0 votes Thank Flag Link Fri Sep 28, 2007
Lease purchases are generally written heavily in favor of the landlord. If you default on the purchase or are delinquent in your monthly rent, generally the landlord can keep your downpayment, which is usually substantial.

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.
Web Reference: http://www.DanMullarkey.com
0 votes Thank Flag Link Fri Sep 28, 2007
The pros and cons of a lease with a purchase option vary greatly depending on how the contract is written.
There is no "black or white" answer with this questions because of so many variables with lease purchase properties.
Web Reference: http://www.480ForSale.com
0 votes Thank Flag Link Fri Sep 28, 2007

Great Question.

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.
0 votes Thank Flag Link Fri Sep 28, 2007
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