Darin is spot on when he says many sellers are not in a position to do a lease option. Here are two reasons:
1. In many cases a seller's loan balance is greater than the value of their home (ie. they are selling short) and no one wants to buy someone elses headache. The bank will not negotiate down on the loan balance unless the home is sold outright.
2. Sellers with equity in their home want to cash out now. They are concerned that if they do a lease/option and property values fall another 10-30%, you won't exercise the option and they just lost all their equity by waiting.
Finding a lease/option is the difficult part. Actually doing one is very easy. If you are working with a Realtor they will have access to all the standard CAR (California Association of Realtor) forms and will be able to help you fill out the right paperwork.
Here are some suggestions if you do find and enter into a lease option:
1. Make sure you make your payments to a 3rd party Escrow or Management company who will pay the mortgage payment first and then release the balance of the funds to the seller/landlord. You do not want to be making payments to an owner who defaults on their mortgage payments while you are making your monthly lease option payments. You could lose both your option money and your opportunity to buy the home.
2. Make sure that the option exercise price is set appropriately. Most sellers who are willing to entertain a lease option set the purchase price significantly above current fair market value. If the price is too high when you go to exercise the option, it will not appraise at the sales price and you will not be able to get a loan to buy the property. In this case, once again, you would lose both your option money and your opportunity to buy the home.
3. Make sure that you record the lease option with the county recorder. This gives constructive notice of your equitable position in the property and would prevent the owner from selling the property to another person as long as your agreement with them is in place.
Hope this is helpful to you. Let me know if you have any other questions or concerns. Dare to Dream.
Shel-lee Davis, CDPE
Your Real Estate Consultant for Life
RE/MAX Palos VerdesRealty
Shel-lee's advice below is spot on. In my Investor Days, I used a Lease Agreement and Option to Purchase Agreement that was HEAVILY weighted in my favor when I was selling... Since so many Home Owners are are behind on their mortgages or tinkering on the brink, Shel-lee's Point 1 is crucial for you to understand. I would hate to see you pay a sizeable upfront Option Fee and pay on time, only to find out that the Home Owner was paying off credit card debt with those funds instead of paying their mortgage... the House gets foreclosed on and you are on the street... With regard to Point 2, I always inflated the "future" Sales Price to account for any potential Appreciation; however, a savvy Buyer could tie the Sales Price to an Appraisal at the time of Purchase... if you can get a Sales Price at today's value, then take it and run! With regard to Point 3, absoutely record the Option... if the Seller plays any funny business, then you have clouded the title and you will have protected your interest! Great answer Shel-lee!
There are some great answers here. You have to find just the right situation to make a lease w/option to buy workable. Most of the time one of the parties loses out. One of the answers below says that you are stuck paying the higher price. If the price goes down at the time you need to exercise your option you can decide to walk away.
Whether or not the payments are actually higher than the seller/landlord's payments and whether or not any of that monthly payment goes toward purchase depends on how the deal is structured. You will need to pay a lump sum to the seller/landlord when you make the deal (option payment) and that will apply to your down payment IF you close the deal.
I have experience with a seller/landlord being upset at the end of the lease when the buyer (me) was exercising the option to purchase. The value of the house had gone up tremendously within that year and the seller tried to get out of it. The deal went through!
To find a lease with an option your agent should look for properties for lease and then look to see if they will also consider a sale. Those are the properties that are most likely to consider a lease with an option.
All my best,
818 339 7712
A lease with an option can be done, however in most cases is probably not going to be in your best interest.
Most of the time a lease option is used when a seller cannot sell a property, so they lease it to a tenant and the tenant negotiates a portion of the rent going toward the down payment (meaning the rent will be more than if the tenant was simply renting without an option.
In return for paying this higher rent, the seller agrees to sell the property to the tenant at a set price. The problem is that real estate values fluctuate, so if you able to negotiate a lease with an option, let's say $400,000, to buy the property in a year. 12 months goes by, if real estate prices go down, then you are stuck paying a HIGHER price than market value.
So the only way it really works is when the prices are going up. The key is to negotiate a price with the seller.Feel free to contact me via my Trulia profile if you have more questions.
The hardest part of a lease to own transaction is finding someone who is actually willing to sell as a lease to own. Many Real Estate Agents won't bother with Lease to Own transactions because they don't want to wait months or years down the road to get paid. That, and the fact that many aren't educated enough to put one together. They usually only know how to deal with a buyer that has 700+ credit and 20%+ to put down.
That's the problem that I'm having....I have TONS of buyers contacting me needing lease to own houses and I read of lots of people looking for lease to own houses..........but sellers aren't willing/aren't in a position to sell that way. And some are just in denile/unrealistic about their house. Just over the past 2 weeks, I've emailed and called about 50 homeowners in the San Francisco area who had their house "For Rent" and as of yet, none have wanted to sell. They just want to lease it out to typical "come and go" renters. I don't even bother trying to call on listed properties. (That would be like subjecting myself to water torture) :-)
The paperwork is fairly simple when you and and Attorney sit down and put everything together. As long as all the points are agreed to PRIOR TO you moving in, then it's a no-brainer. It's simply a lease agreement and an option to purchase agreement. The major points that you would need to agree to is how long the lease is, what the purchase price is going to be, what your monthly lease payments are going to be, and who is responsible for the maintenance throughout the lease. All the other stuff can be agreed to and written down in the paperwork by the Attorney/Title Company before you move in.
Best of Luck!
Lease to Own Professional and Independent Consultant