Of course it is dangerous for the buyer. Anything you do to â€œwork aroundâ€ the system that is there to protect your rights increases the risk of a financial disaster. It is a great deal for the seller, they get a non-refundable deposit on a deal that has little chance of every converting to a purchase. Obviously even some Realtors do not understand how this puppy works, evidenced by a previous answer that states half the rent applied to the purchase price. A mortgage underwriter is never going to allow that, they must follow the mortgage guidelines when it comes time to pay off the seller.
So the system that protects you turns around and bites you when you try to work around it. The plan drawn up in the beginning does not work as the buyer expects when the lease option period is over. When that day arrives the buyer thinks they have all this equity built up and the mortgage underwriter doesnâ€™t agree, they canâ€™t agree, they must follow the rules the parties tried to work around.
So the buyer canâ€™t refinance the property to pay off the seller, unless they documented a sufficient amount for the down payment (not rent paid unless it exceeds the fair market rent). The buyer canâ€™t sell the property because they do not own it. The buyer ends up walking away with nothing most of the time, my estimate is above 97%. I got that percentage from a real estate attorney that actually draws up a pretty decent lease option agreement. His contracts do reflect the mortgage underwriting guidelines and still 97 out of 100 never end up transferring title!
I think you get my drift, it is crazy to work around the rules on the front end and expect them to somehow magically save the day down the road.
The only way to address the risk is to word the purchase option EXACTLY the way the mortgage guideline for the type of loan you will use down the line is worded and even then it is risky. The guidelines change fairly frequently, expecting a bunch of changes next month.
I hope my insights keep you from losing money, but if you still want to pursue this I linked some additional info below. Good luck,
NMLS # 6395
Financing Kentucky One Home at a Time
I answer questions about financing real estate based on my decades of experience dealing with mortgage underwriters. This answer is my personal opinion, has not been reviewed or approved by the company I work for. I do not offer legal or tax advice, if you need answers from an attorney or CPA find one knowledgeable in your local market.