Joe has done a nice job summarizing how this option works. A major consideration, of course, is the local real estate market and where it is likely to go during the course of your lease option--and the lenght of time you would likely keep this home.
Since Joe is based in Seattle, and I am based in Charleston/North Charleston, I can lend you some insight on that by give you some data on North Charleston (outside the Mark Clark/I526). In 2007, the median price of a single family home sold for about $168k; for a 3BRM home it was 160k. Last year (2006), it was $155k (for a 3BRM it was 150k). More critically, the housing inventory has worsened with more housing going on the market and fewer houses being sold in the N. Charleston market compared to 2006. While some local Realtors anticipate an improvement in the market in 2008, I do not. (locally, I write newspaper columns on this topic and do analysis--all of which can be found on my website). In the longterm (5 years out), I am quite bullish (I've included some historical data below).
Nevertheless, the current market condition is a VERY important consideration in terms of locking in a house for today's market for purchase later. In a buyer's market, the seller basically has now secured a likely buyer, what have you gained? The devil, as they say, is in the details: the specific neighborhood you are purchasing the property in; the actual agreed upon purchase price and any other terms (e.g., are you or the owner responsible for maintenance; at what point(s) can you excerise the option to buy). Keep in mind also the economy and issues such as mortgage interest rates. Even if you lock in a good price today you may end up losing money if interest rates in the future (say 12 months out) increase or your credit worthiness changes. It may be, however, that by paying off your loans during this lease/option period, you credit worthiness will improve, resulting in a more attractie mortgage rate.
In the Charleston area, real estate is a GREAT investment. For example, seven years ago, in 2001, when the market was levelling out here a bit after 9/11 and the stock bust (and before the run-up in prices), an existing single family home sold in the North Charleston (outside 526 area) for about $98k and a 3BRM for 96K. That represents an appreciation of about 71% (not taking into account various savings from tax deductions,etc).
Make sure you have a very knowledgeable real estate person to advise you on the properties you are considering--and I would suggest talking to a tax specialist as to pros/cons of such a venture.
James Sears, PhD
I currently am negotiating a similar situation on my own home with someone that has the monthly income available to buy my home and closing cost, but their credit score is not high enough...not enough credit! So, we are agreeing to do the Lease with OPTION to Buy because I have ALREADY moved out of my house. I was going to just rent it...but this came up and seemed like a better deal for me Both the LEASE and the OPTION to PURCHASE ends in exactly 1 year. If they can obtain suitable financing before then, we will move forward. Their final deadline will be the end of both agreements. At that point, they MUST purchase the home. If they cannot or will not, regardless of the reason, they lose all of the money that they paid extra each month. They also do not get any reimbursement for any improvements or maintenance expenses they incurred. They will be responsible for any damages done to the home while there. They will also not be allowed any refund for any Option Money they paid me to "hold" the house from listing it on the market during the Option Period. So, you see this is an actual 2 step process with addendums or disclosures on each document. 1) The Lease. 2) the Agreement to Buy/Purchase Real Estate.
The second agreement, Agreement to Purchase Real Estate is an actual contract written up and witnessed with all contingencies just as if they were purchasing today...but it will say to be purchased on or before X Date. It should show the OPTION money being paid by the potential buyer. The payments being made each month in the rent that will be applied to the purchase price agreed upon, and the ways that either party could be in default.
If you are in doubt at all, I recommend you contacting an attorney for a brief Real Estate Consultation for advise.
You probably will be doing someone a favor that is in the market to sell right now just to get out of their payment, so make sure you get a good market appraisal done on the property you decide on. A Realtor will be able to do that for you at no charge. You should be able to get a great deal right now!
Good Luck and kudos to you for wanting to get out of that debt first. Just don't go and add anything new. :)
Basically you enter into an agreement to rent/lease a property with an option to purchase. The purchase price is typically agreed to up front. A deposit is usually collected as well that is credited towards your purchase price. However, if you don't exercise your option to purchase, the deposit and any credits you've negotiated for the term of the lease is non-refundable. It's a good way to go if the market is going up and you are able to secure a lower sales price upfront. It's also a good way to re-establish or rebuild your credit if it's not so great. Go to http://en.wikipedia.org/wiki/Lease_option for more information. If you have any other questions, feel free to contact us via email. Cheers. KariAndJoe.com Team in Seattle, WA