My suggestion is that everything be spelled out very clearly in your initial agreement, just as Dot said. I would have a Realtor or attorney protect you in this. Have an escrow opened, with the deposit and any monthly amount that is targeted toward the purchase to go into the escrow account. Not only will you know that your money is protected, it will also help you when you are ready to complete the purchase. It will show the lender your track record of making payments.
In addition, I would suggest that you formulate (and contracturally document) that you have a proof of payment to the mortgage lender each month- whether the seller faxes you confirmation of receipt of payment, allows you to view the lender's payment website, or whatever- you need to know that the monthly payments (and taxes) are current.
Lastly, if you are going to be making improvements to the property during the lease option time period I would protect yourself there somehow also, in your contract.
Last, some lease options file a lien against the deed for the amount of the deposit, until the lease option is excersized. This is a bit more difficult to get the seller to agree to, because if you were to default on your portion, they have the lien, so they may not go for it.
Protect yourself- and the seller, in every step of the transaction!
In California and if you have a written lease, and if it is a recordable document clearly showing legal description of the property, you can file a Lis Pendes with the county recorder. You can also file and Request for Notice involving this property and ask that the recorder notify you of official other recordings during time of the lease.
Please hire a qualified Realtor agent for your situation involving this lease.
Harrison K. Long
Realtor & broker
Explore Group Properties, Coldwell Banker Previews
http://www.BuyersExploreHomes.com (The Best Web Site For Property Searching)
It is also true that we are in a declining market - in a lease option there is always one side that loses out...
I would also hesitate to enter into this type of contract in certain areas where the prices are really declining. You don't want your deposit at risk if you choose not to go through with the purchase at your current agreed upon price down the road.
We bought our house through a lease option and the house had appreciated quite a bit. The seller was remorseful and tried everything he could to stop us from closing on the house. He even lied and said we had made late payments...we had every receipt and cancelled check. We had to hire an attorney to make him back off and go through with the sale.