I get asked a lot if a "lease option" is the way to go from both owners and tenants. The lease option definitely has its purpose but I think there is more confusion than anything about these types of transactions.
Let's first talk about what is a "lease option" and what the purpose is. A lease option is a when a buyer reserves the right to purchase a specific property, for a specific price, during a specific time period. In the interim, they are living in the home and paying rent until they decide to 'exercise the option'.
The "terms" of the lease option are completely open and can be whatever is agreed between the optionor (the owner) and the optionee (the tenant). The terms are normally referring to the option amount, the monthly rental amount, the option term, and the purchase price.
The "option amount" is what normally throws most people and what usually kills the deal. If you are going to enter into a lease option, there needs to be some type of "consideration" (or money) to seal the deal. This money is thought of as an initial down payment to the purchase and it doesn't have to be but usually is non-refundable. The option amount can be as little as one months' rental amount or it could be 5-10% of the future purchase price. This consideration is money paid to the owner for the right to reserve the home to purchase and limits him from trying to sell it to anyone else during the option term. Many tenants I speak with think they like the idea of a lease option but do not have or want to put down a non-refundable down payment! Which is fine but without this consideration, there really is no point for the owner to reserve the home for only you. One of the benefits of the owner offering a lease option is to receive the up front down payment from the tenant.
The rental amount is another term that needs to be decided upon. Normally, in a lease option the rent is higher than market rate and some or all of the rental amount also goes towards the purchase price. Many tenants do not want to pay above market rent in order to secure an option to purchase and again, if the owner is not benefitting from increased rent there really is not point to entering into the agreement.
The term of the option is also a factor that needs to be agreed upon. The average term is 12 months but it can definitely be shorter or longer just depending upon what the two parties agree upon.
The purchase price is usually the most important factor in a lease option and this is normally most important when the market is going up! When home prices are increasing, it would definitely behoove a tenant to lock in their price now for a sale down the road in 12 months or so when homes might be much higher. The owner is willing to do this because he has the added benefits of a buyer in waiting, an up front deposit that he gets to keep whether or not the home is purchased and a higher than market rental income. The tenant benefits because they're rent is being invested into a home they will soon own. It can be a win win situation for all in the right market!
In a down market, this option really doesn't make a whole lot of sense! There's no reason to lock yourself into a home for a particular price now when the home may be worth much less in the future. Also, in a down economy if you lose your ability to purchase a home due to a job loss or reduction in income, you also risk losing your down payment money if you can't exercise the option. This may be an unnecessary risk especially when there are no shortages of homes on the market.
My advice in this market is instead of complicating things with a lease option contract, just ask the owner for "first right of refusal" if he decides to sell. This means that if the owner decides to sell the home, he must ask you first and give you the first chance to buy the home before anyone else. The purchase price will be at market or appraised value and if you can qualify, then you move forward with the purchase. If you don't qualify, then you simply don't buy the house and you haven't lost any money in down payments or inflated rents. This simple term can be written into any lease and can be a good option for all involved.
Again, a lease option can be a great tool for someone who isn't ready to buy right now but in a down market it doesn't make much sense. I hope this has been helpful to you and I wish you the best of luck in finding a rental. Please make sure to visit our website at http://www.renttoday.us
to find home rentals in the Alameda area or all over southern california.
Mia Melle, Broker
West Coast Property Specialists, Inc. / Renttoday.us