I`m in `marital transition`.What are the pros and cons of alease with option to buy?

Asked by William Meyer, Illinois Sun Jun 8, 2008

and....whats the best method of determining a contract price,with what amount of typical premium designated to the downstroke every month

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Don Tepper, Agent, Burke, VA
Mon Jun 9, 2008
BEST ANSWER
Mike raises a very good point regarding the owner's behavior during the time you have a lease-option. Refinancing the property is one risk. Going into foreclosure is another. Selling the property is another. All these things can (and do) happen, though not commonly.

I'm not a lawyer, so this isn't legal advice. However, there are other ways to protect yourself, though. First, to prevent (or at least have a good chance at preventing) a sale or a refinancing, you want to "cloud the title." You can do this by filing a "Memorandum of Agreement" with your local city or county. It doesn't have to spell out the terms and conditions of the lease-option; it simply puts the world on notice that another party--you--has an interest in the property. Usually (the technicalities vary from jurisdiction to jurisdiction) the memorandum is signed by both the optionor (owner) and optionee (buyer), notarized, and recorded. That'll cloud the title.

Second, to know whether the owner is making his/her mortgage payments on time, you want a document, often called an "Authorization to Release Information." That will allow you to contact the owner's lender(s); the owner requests the lender treat you in the same manner as they treat the borrower regarding release of information.

Regarding the "best method" of determining a contract price, keep in mind that at the end of the lease-option you'll be getting financing in your own name. Therefore, from a price standpoint, you want to make sure that the property will appraise for the agreed-upon price. In today's market--depending on where you are geographically and what your market is doing, as well as the length of the option--the contract price probably will be pretty close to today's fair market value. The owner will want it as high as possible, but it doesn't do the owner any good if it's set so high that the property won't appraise, and you're not able to buy.

And that leads to the inclusion of some additional protections for you in the option. Again, I'm not a lawyer, so this isn't legal advice. But you want one or more provisions in the option in case (1) the property won't appraise, or (2) you aren't able to buy. Regarding the property not appraising, the basic choices are: (1) the owner agrees to lower the sales price to the amount of the appraisal, or (2) the owner agrees to extend the option for an additional period of time (often 1 year). If it's the "owner's fault"--not really his fault, but a problem with the house not appraising--often the owner bears the cost...reducing the price or extending the option.

On the other hand, if you aren't able to close because, say, you don't have a sufficient downpayment or your credit isn't good enough, that's "your fault." The protections, in that case (if the owner agrees in the option upfront) might be to extend the option for an additional period (say 1 year), in return for an additional payment from you. You'd be paying for an option extension.

There's no "typical premium" or amount from the rent credited toward the option and, thus, the purchase. And it's all negotiable. However, very generally, an amount equal to about 20% of your payment is considered reasonably generous. I've seen less, and I've seen more. Often, the more you're paying each month, proportionately greater the amount credited. For example, just to use round numbers, if fair market rent were $1,000, you might pay $1,100 a month with $200 a month credited to the purchase price. If you paid $1,200, then $300 or $350 would be credited. And so on. Sometimes, sellers will want more in rental per month, but credit a greater percentage to the purchase price.

Hope that answers your questions. Post others as they occur to you.
2 votes
Don, great point on clouding the title!
Flag Sun Jul 8, 2012
Mike Stodola, Agent, Libertyville, IL
Mon Jun 9, 2008
I couldn't answer the question better then either of the last two with the exception that you want to be careful when writing a lease option. What I mean by this is make sure that your down payment and monies applied towards down payment are separated and held in an escrow or reserve account by the owner. For example, say you want to buy a home for $200,000 and you give the seller $5k up front (to be applied towards the cost of the home if/when you buy) and you're getting $500 a month credit towards the cost of the home. At the end of a year you decide to buy and think you have $11,000 ($5,000 up front and 12 x $500 a month) towards the purchase price and you find that the seller refinanced their home and actually owes $200,000. They also don't have $11,000 plus expenses to bring to closing so where has your $11,000 gone (a new car, the sellers took a nice vacation on your dime)? What you'll want to do is really set it up so that you are paying two checks every month. One made out to the owners with a memo for rent. And a second check for $500 (just used in the example) to the escrow account they've set up and a memo stating that it's towards principal reduction for 123 main street. This will better protect you then simply writing one check a month. There are many pro's to this method which is even more true for people in transition who don't want to pick up additional assets at the moment, but don't want to be throwing away money on rent. Feel free to call to me at 847-557-1622 and ask for a free list of homes that are for sale with a lease option. If you have any further questions, I'd be happy to answer those, or I work with an attorney who specializes in Family Law and Real Estate and he said he'd be happy to answer any specifics for you. Good luck! Mike Stodola
1 vote
Paul Mackey, , 60060
Mon Jun 9, 2008
Assuming "marital transition" means you are in the middle of a divorce and it is a ways away from being finalized, lease options are the way go according to the attorneys I have worked with (always check with yours first). The only con's are the cost the cost of the option (if you decide not to exersize the option), limited equtiy growth during the lease, and no interest to write off. On the pro side, many a seller will give great terms on lease options in Libertyville area. For more give me a call 847-542-4088 or go to my web site http://www.JPMackey.com
Web Reference:  http://www.JPMackey.com
1 vote
Scott Epstein, , Crystal Lake, IL
Sun Jun 8, 2008
The pros are that you get to live in the home for a specified period of time before purchasing it, so you'll be aware of any defects with the home you might not have known until after you had closed. You'll also get to know the area (if you didn't already) and meet your neighbors. The cons are that you don't get to take advantage of some of the tax benefits from owning a home and in most circumstances there is a non-refundable deposit associated with the option price (this is the cost of the option). There is separate from your security deposit. Your option purchase price could be a pro or a con depending on what the market does in the time in between.

As for as the amount every month that would go towards paying down the purchase price, it's typically $200-300/mo. but this is certainly negotiable as well.

If you have any additional questions regarding rent to own options, please contact me at scott@illinoisrealestate.com.
1 vote
John Walin, Agent, Libertyville, IL
Sun Mar 31, 2013
old question here, but a lease option to buy is generally hard to put together and at best gives you right of first refusal.
0 votes
Sue Lentini, , Libertyville, IL
Tue Mar 29, 2011
Marital transition and home buying can be both financially and emotionally consuming. My suggestion would be to handle the marital situation and rent for a while before deciding on a purchase. Most of us need a transitional period to regain a clear focus and realize what it is we desire in this stage of our lives. Your question did not mention whether or not children are involved. If not, you will want the time to focus on yourself and regain your independence. If children are involved this time will give you an opportunity to focus on their needs during this adjustment.

When the time is right to purchase a lease with option may be an answer. Generally 10% of the monthly rent would be applied but this can vary as it is negotiable. You need to have the proper representation for this contractual agreement including a Realtor, an attorney and an appraiser.

Another suggestion might be an outright purchase. If your credit is solid you may be able to negotiate a better deal to purchase than a rental with option. Most homeowners are more willing to negotiate price when it is a sure thing. You have time so take it. When you purchase the right property it can provide you with many years of comfort and enjoyment.
Web Reference:  http://www.suelentini.com
0 votes
John Walin, Agent, Libertyville, IL
Thu Sep 30, 2010
William,

I would recommend a straight up lease for one year and then have an idea of what areas and neighborhoods you want to buy into at your price point. Land contracts, or lease options to purchase are complicated and require you to lock in at a premium price now, (otherwise the seller has no incentive to rent and hold themselves to a future price) and typically have a non refundable escrow if you waive the option to purchase. Add to that, until you have a formal divorce decree, you cannot buy anything without your ex-wife's permission.

If you think prices are going to go up, lease option is good, if it stays the same or goes lower, why bother? Typically these deals involve setting future purchase price, waiving mortgage contingency and doing home inspection prior to starting the lease, not prior to execution of lease to purchase. Usually rent price is increased to reflect the amount of walk-away money you are willing to allow the seller to keep if you don't exercise your option. So for example, if competive rent is $2000 per month, the seller might want $2500 per month with $500 going toward purchase price and non-refundable. Seller gets higher rent than market and is taking the risk that you think the house is worth less than contract price one year forward and walk. You would have $6,000 going toward the predetermined purchase price and that ties you to the property financially and makes it harder to walk away. Of course if the house down in value $10,000 at the time you exercise option, you are better off walking away and letting seller keep the $6k. You have the right of first refusal, so that is worth something too. If you had kids and wanted to live close to their school and do joint custody, you might need to weigh that into your decision.

Ran on a bit, call me if you would like to discuss...John Walin 847 276-0120
0 votes
Eric Egeland, Agent, Buffalo Grove, IL
Mon Jul 6, 2009
William,

You will most likely need to rent only if you are looking for another residence until your divorce is finalized (definitely speak with an atty on this matter) as any equity stake you might possibly gain would come into play when assets are determined.

Also, rarely does an 'option to buy' benefit the buyer in a flat or declining market.
0 votes
Mike Garr, , mobile agent on the move
Tue Nov 11, 2008
You need to get the martial stuff final first and worry about the option later your still married. I would be happy to discuss options and results of forming an offer http://www.mikegarr.com. If the peoperty is refinanced or sold or foreclosed than the due dilagence of the buyer party is a breach of that option. One of many professional realtor s can set it up to cover all the bases call one today.
0 votes
Dana and Tom…, Agent, Long Grove, IL
Mon Jun 16, 2008
Good question. The obvious advantage is that you have the option, but not the obligation, to purchase the home if you decide that it is in your best interest to do so. Also, you have the ability to negotiate the price up front, thus locking in a purchase price should the value of the home go up dramatically while you are 'renting' it. Repairs are usually still the responsibility of the landlord, so that is another advantage. One disadvantage is that the majority of your monthly payment is rent.

To determine the contract price, hire a professional Realtor and/or a professional appraiser to come up with an accurate value of the home. 10% of the monthly payment should be allocated to the purchase price should you exercise your option to buy, but this is negotiable.

Please call me if you would like to discuss this.

Tom Carris, Realtor/Broker: 847-334-6538
RE/MAX Showcase
Long Grove/Mundelein
Lake Forest
Gurnee
Waukegan
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