Dale's advice on lease-options is basically solid, and I recognize that practices vary from area to area. However, let me--if not correct, at least--comment on some of her statements.
Dale says: "The sellers typically fall in one of two categories - a) investors who routinely have homes that they rent out that will consider also selling them and b) home owners who have not been able to sell their homes who will consider renting them out or doing a lease purchase sale." In today's market, the large majority of lease-options are coming from owners who haven't been able to sell their homes. Yes, some investors do make homes available but (and I'm a real estate investor, so I'm just being honest here) some investors really hope the tenant-buyer does not purchase. It can be pretty lucrative collecting an up-front option fee, plus slightly above-market rent, and repeating that entire process every year or two. The property can turn into a cash cow. Now, lots of investors don't do that. But be careful that the terms and conditions look do-able during the option term.
Dale writes: "a) the seller will want to check your credit and have you talk to a loan officer to get a preapproval letter - they will want to know that there is a good chance that after the 6 months to a year (occasionally longer) that is negotiated into the contract that you will rent the home before you then buy the home that you will then be able to get a loan and buy the home." That's good advice for sellers, but not all of them do it. And they recognize that if you're trying to buy a house on a lease-option, you're not likely to be able to get a preapproval letter. As Dale correctly observes: many buyers are "waiting for their credit history to improve/or to build up financial reserve" In other words, they can't buy now, or at least they can't qualify for what they want...but in a year or two they may be able to. And, to oversimplify, there's "good" bad credit and "bad" bad credit. It's often OK if the tenant-buyer had a good credit history, then encountered some problem (job loss, medical bills, etc.) that affected his/her credit. That can be improved, and it's an indication that the tenant-buyer has a positive attitude toward paying bills. "Bad" bad credit describes so-called "deadbeats." They habitually don't pay bills; they routinely skip out on landlords. A close examination of a person's credit report will help determine which category the person falls into.
Dale says: "The seller will typically have a more stringent earnest money payment that you will lose if you back out of buying the home, since they will have taken the home off the market for much longer for you. " Not always. First, it's not earnest money. It's an option fee, which is credited to the purchase price if the option is exercised, and is retained by the owner if the option isn't. Second, to the extent that the owner had been trying unsuccessfully to sell the property, he/she is willing, even happy, to take it off the market and to get some cash flow from the property.
Dale writes: "some sellers will essentially have you pay the typically rent payment and will take a portion of that and put it toward the purchase price, others will add to that payment for the purchase price - what will determine that will be not only the going rate in the neighborhood, but if the home is paid for, or if they are paying off their mortgage still. If they are still paying off their mortgage, they will not be as flexible on pricing or as willing to work with you on a lease purchase as someone whose house is paid for." Generally true. Remember, though: Everything is negotiable. Some owners will take less in monthly rent in return for a higher purchase price. Some will offer a couple of options on rents and rent credits. For instance, if the typical rent for a property is $1,000, the owner might only charge $1,000 and credit $100 of that to the purchase price. Or he might charge $1,100 and credit $100. Or he might charge $1,200 and credit $200, $300, or even $400 to the purchase price.
Dale writes: "d) if the seller needs the money to buy their next home, they aren't as likely to want to do a lease purchase." More to the point, they can't. They need their money out of the house. Now, if they don't need all their equity, they can tap some of it, via a HELOC, for instance, and use that money for their next purchase.
Dale writes: " St Louis MLS that all the Realtors use to find homes for people, has no category for lease purchase. We can search for homes for sale, we can search for homes for rent, but we can't search for homes for lease purchase....As a result the best is to search the database for rentals and to look for words in the marketing comments that indicate that the owner will also consider a lease option." Yes, that's one way, but there are many others. Look for expired sales or rentals. Look for sales with long days on market.
Out of space...but many other ways.