As the buyer, you are not locked into anything. And if you find a sufficiently motivated seller, you can avoid paying a large up-front option fee. I once purchased a home this way and got a fabulous deal.
Be aware that finding and negotiating them is not super simple. You might have to be proactive and find that rare seller who can move onto their next housing situation without getting all of their cash out of the house - and is willing to do so. You also will need to avoid situations in which the seller goes into mortgage distress and loses the home out from under you. Involving a title company and recording your lease-option can go a long way toward protecting yourself, but it will cost you a bit up front.
Let me know if you need some help.
REThink Real Estate
I get asked a lot if a "lease option" is the way to go from both owners and tenants. The lease option definitely has its purpose but I think there is more confusion than anything about these types of transactions.
Let's first talk about what is a "lease option" and what the purpose is. A lease option is a when a buyer reserves the right to purchase a specific property, for a specific price, during a specific time period. In the interim, they are living in the home and paying rent until they decide to 'exercise the option'.
The "terms" of the lease option are completely open and can be whatever is agreed between the optionor (the owner) and the optionee (the tenant). The terms are normally referring to the option amount, the monthly rental amount, the option term, and the purchase price.
The "option amount" is what normally throws most people and what usually kills the deal. If you are going to enter into a lease option, there needs to be some type of "consideration" (or money) to seal the deal. This money is thought of as an initial down payment to the purchase and it doesn't have to be but usually is non-refundable. The option amount can be as little as one months' rental amount or it could be 5-10% of the future purchase price. This consideration is money paid to the owner for the right to reserve the home to purchase and limits him from trying to sell it to anyone else during the option term. Many tenants I speak with think they like the idea of a lease option but do not have or want to put down a non-refundable down payment! Which is fine but without this consideration, there really is no point for the owner to reserve the home for only you. One of the benefits of the owner offering a lease option is to receive the up front down payment from the tenant.
The rental amount is another term that needs to be decided upon. Normally, in a lease option the rent is higher than market rate and some or all of the rental amount also goes towards the purchase price. Many tenants do not want to pay above market rent in order to secure an option to purchase and again, if the owner is not benefitting from increased rent there really is not point to entering into the agreement.
The term of the option is also a factor that needs to be agreed upon. The average term is 12 months but it can definitely be shorter or longer just depending upon what the two parties agree upon.
The purchase price is usually the most important factor in a lease option and this is normally most important when the market is going up! When home prices are increasing, it would definitely behoove a tenant to lock in their price now for a sale down the road in 12 months or so when homes might be much higher. The owner is willing to do this because he has the added benefits of a buyer in waiting, an up front deposit that he gets to keep whether or not the home is purchased and a higher than market rental income. The tenant benefits because they're rent is being invested into a home they will soon own. It can be a win win situation for all in the right market!
In a down market, this option really doesn't make a whole lot of sense! There's no reason to lock yourself into a home for a particular price now when the home may be worth much less in the future. Also, in a down economy if you lose your ability to purchase a home due to a job loss or reduction in income, you also risk losing your down payment money if you can't exercise the option. This may be an unnecessary risk especially when there are no shortages of homes on the market.
My advice in this market is instead of complicating things with a lease option contract, just ask the owner for "first right of refusal" if he decides to sell. This means that if the owner decides to sell the home, he must ask you first and give you the first chance to buy the home before anyone else. The purchase price will be at market or appraised value and if you can qualify, then you move forward with the purchase. If you don't qualify, then you simply don't buy the house and you haven't lost any money in down payments or inflated rents. This simple term can be written into any lease and can be a good option for all involved.
Again, a lease option can be a great tool for someone who isn't ready to buy right now but in a down market it doesn't make much sense. I hope this has been helpful to you and I wish you the best of luck in finding a rental. Please make sure to visit our website at http://www.renttoday.us to find home rentals in the Alameda area or all over southern california.
Mia Melle, Broker
West Coast Property Specialists, Inc. / Renttoday.us
Rent-to-own is great for someone who finds a house they really want but can't afford to buy it for awhile. Maybe they don't have the down payment, or maybe they're working to improve their credit. And, despite the concern about falling prices, it's very good when prices are unstable. If prices rise, you've locked into a firm (low) price. And if prices fall, you just walk away at the end of the option period.
True story regarding the latter: I was offering a lease-option on a condo back in 2006. Prices in the complex for that type of condo had been about $80,000. Then, in the big price runup, they reached $275,000. And with easy money, a feeding frenzy, and comparatively cheap prices, lots of people were buying. I was offering the condo as a lease-option for $260,000. Unfortunately (for me and for them), no one wanted it. Anyone who could, as they say, fog up a mirror could buy. And with cheap intro rates, it was really cheaper (for the first few months) to buy than to rent. It cost about $1,200 to rent; you could get a stated income 103% negative amortization loan starting off for about $900. Well, the market collapsed, as you know, and virtually everyone who bought in 2004-2006 lost their condos to foreclosure. Had they lease-optioned my condo, they could have walked away at the end of the lease (1 year) having lost just a modest upfront option fee. Or, heck, they could have continued renting. Instead, all those folks who decided to buy instead (and 99% of them did so) lost their homes. So lease-options can be a great protection in a declining market.
But I digress.
I'm not active in Alameda. But I know investors who are, and there are plenty of lease-options there. There's also another strategy that accomplishes the same thing using land trusts. And I've written plenty of posts in the past on how to find lease-options. (A few, but not many, will be listed as such on the MLS.)
So: Determine whether a rent-to-buy option is really what is best for you. It may or may not be. But if it is, there are plenty of properties you can find.
Hope that helps.
In the 25 years I have been selling real estate in the Bay Area, lease options have not been an option in Alameda. Property values overall have always increased in value. In the early 90's values did come down a bit but that did not lst long. In this market values have come down but not like the surrounding areas. We are no longer in a declining market and values are increasing a bit again. A lease option may be possible in other areas surrounding Alameda. If you can afford to buy, now is the time to do it while values are still a bit down. Good luck to you and your family.
Take it easy...rent for a while and enjoy a more leisurely time to look, should you decide to buy. Depending on when you are coming back, we should see more homes available on the market by spring. Right now, the inventory is very low which means fewer choices for you.
Rent to buy, in principle, can be good for folks who lock in property at certain price....
However....what if you find something better? Depending on your lease-purchase agreement, you may have to put a non-refundable option that you will lose if you decide to buy something else.
With the number of short sales and foreclosures expected to increase, we expect that market prices will stabilize for a while. We are at, or perhaps near-bottom prices now (approximately 20% less than what they were in 2007, or right around the 2003 price levels)....
So many things to factor into your decision of whether or not to buy now or later. Do you qualify for either the first time or repeat buyer tax credit? If so, you will have to be in contract by April 10, 2010 and close within 60 days to qualify for the tax credit.
Also there is a bill --- HR 3706 --- submitted to raise the FHA down payment from 3.5% to 5%. Interest rates are expected to rise up to 6% or higher by spring.
Good luck, whichever way you are inclined to go.
Good luck to you.
Most of the time rent to buy options are between you and the landlord. Most rentals are advertised as just that... rentals. Past experience has shown that it is usually a good relationship with the landlord that brings these up.
That being said lease options are not always the best deal for you in terms of negotiating a sale. Options usually require you to put up a non-refundable deposit and agree on a price. This price may change depending on the market. My advice would be to rent, save your money and then go looking for the home you really want when your ready.