Lease to Purchase Home?

Question

Can anyone really explain this in none complicated real estate terms and how this works and if it is a good way to go with bad credit?

Answer 1

I am an investor that sells my homes this way. I pay for the credit repair company to work with you. Make sure you buy from someone that pays it for you. Also make sure that you can afford what you are going to buy. I get many calls from people that I will not just throw in my houses because they have no real shot at getting qualified. Some unethical investors will put you in knowing that you probable will not quilify therefore will keep you option consideration and resell it later. Make sure you look at this realisticly. Here is an article explaining a Lease Option or Rent to Own.

Rent To Own Homes Explained
By: Bob

If you desire to own your own home but are unable to secure conventional financing today, leasing a home with an option to buy may be your best option. A lease purchase can make your rent money work for you instead of making your landlord rich. Typically rent to own homes offer rent credits that reduce the final purchase price!

Here's how it works:

A home is made available via a standard lease with one important addition. Included is an option to purchase that home at a specified price over a specified time period (usually one or two years). In order to acquire that option, the renter/buyer must pay a one time, NON REFUNDABLE, fee called the option consideration. The exact amount is negotiable, but it is usually ranges from 2.5 to 7% of the purchase price. A fair contract will credit the buyer 100% of that option consideration upon closing of the sale. Furthermore a negotiated percentage of all rent payments should be applied toward the purchase price of the home. Some typical terms and conditions one might expect to find in a contract follows:

In order to receive a rent credit of 50%, time is of the essence. You MUST pay your rent on or BEFORE the due date of your lease (typically the 1st of the month). This means it must be received by the lessor (landlord) on or before the due date. Any payment received after the due date will result in a 0% rent credit for that month, a late fee may apply and you will not be building any equity.

Maintenance is the responsibility of the Tenant Buyer. You are now renting to own and homeownership requires maintenance. This includes things like broken windows from stones or baseballs, clogged drains, peeling paint, broken appliances, burnt out bulbs, lawn work/snow removal, etc. If any major repairs are required to ensure habitability, the owner remains responsible.

You need to have Option Consideration. Option Consideration is typically 2.5% to 7% of the purchase price of the home. It is a non-refundable payment, of which 100% is credited toward the purchase price, which binds the lease purchase contract.



Here's an example transaction:

We have a nice 3 bedroom, 1 bath single family home located in a near west suburb of Chicago in a great neighborhood with good schools and a strong community. It has been freshly painted, cleaned, and is ready to move in. The purchase price will be $215,000. Monthly rent payments will be $1,500 and you will receive a 50% rent credit ($750 per month). You need between 2.5% and 7% in up front Option Consideration. Let's say your budget allows for $6,000 for Option Consideration. This equates to approximately 2.8% ($6,000/215,000). You will also need $1,500 for the first months rent for a total initial payment of $7,500.

Please note: Option consideration is not a security deposit. It is a non refundable payment toward the purchase price and is 100% credited toward reducing the price of the home.
Now suppose you paid all your monthly rent payments on or before the due date and you choose to buy the rent to own home at the end of the 12 month lease purchase contract. You will have $15,000 in equity before you even own the home! Here's the math:

Lease Purchase Price - $215,000

Less: Option Consideration paid at lease signing - $6,000

Less: 50% rent credit of $750/m * 12 months - $9,000

Net Purchase Price after credits - $200,000

You started with $6,000 and by paying your rent on time; your equity position grew 150% (another $9,000) for a total of $15,000 with 12 months. Not a bad deal! Many people find it nearly impossible to save $9,000 in a year with all the costs of living constantly on the rise.

What's the catch?

Now you may be thinking, "OK, what's the catch? This sounds too good to be true."

Answer, there is no catch.

There are many possible reasons a landlord/seller may want to enter into a rent to own agreement. Some reasons may be:




Needs to maintain ownership for at least one year for tax purposes.

Unable to get a fair price due to local conditions.

Tired of performing minor maintenance.



Furthermore, when one sells a home through a realty service, a commission of 5-7% is typically paid. In the example above, this can cost more than the rent credit. Since realtors are usually not involved with this type of transaction, there is no commission and the landlord can afford to pass along the savings to tenant/buyer in the form of rent credits.

Also, when the Tenant becomes the Tenant Buyer (via rent to own), there is an immediate sense of pride in ownership. Tenant Buyers add value to the community. They take care of their future property, make improvements, and feel good knowing their rent money is working for them (reducing the purchase price) rather than just making their Landlord rich.

There are also many advantages for the renter:

Build equity toward home ownership.

No bank or finance company involvement.

Poor credit history may not be an issue.

Answer 2

It can be a very good way to go, especially if your credit is marginal. But the deals are complex, because you have both a rental agreement and a purchase option to hash out, and the option will have terms not only for the actual purchase of the property but also for the consideration and running time for the option -- as well as what happens in the event of mishaps such as a default.

The rental agreement is perhaps the simplest part of this. Typically, some portion of the rent is credited against the purchase price if the option is exercised. The exact amount, as well as the rental amount and terms, need to be negotiated.

The option is the next part. You will need to have the potential seller execute, notarize, and record a Memorandum of Option, which states that an option exists, and when that option expires. This is the buyer's protection from the owner selling the property twice. The Memorandum need not, and ordinarily does not, recite all the terms of the option: it merely notes that there is one.

The sales agreement is the last part. These typically run several pages of fine print, dealing with what is to be paid, and how, and when; when title is to be deliviered, and in what form; any contingencies (particularly financing), and what happens if something goes wrong.

If you are savvy in real estate, and do your homework, you can wade through this paperwork morass. But if you have any doubts, get help from a professional. A screwup can cost an utterly unbelievable amount of money and headaches.

Answer 3

Usually called a LEASE OPTION. There are two parts to this. The LEASE - or rental agreement and the OPTION. The lease is nothing more than a typical rental agreement.

The option is nothing more than a contract saying you can buy the house for a specific amount of money within a specific time period. It is up to you (the buyer) if you want to do this or not. Sometimes a portion of your rent payments are credited toward the purchase price of the house. If there is an OPTION fee that means it is a lump sum you are paying to get the OPTION contract to buy the house for a specified amount of money.

It is a good way to go with bad credit but if you don't know what you're doing have an attorney look everything over because you could get taken advantage of quite easily if you are not familiar with this type of deal.

Answer 4

If this is an opportunity for you, yes it is good, with bad credit No,
this can be a one to 2 years lease, at the end of the lease the owner will sell the property to you, the money that you have already paid for rent should be a part of the purchase price, make sure that is in the contract also, if you have bad credit you are not a good candidate.

Answer 5

Your first answerer is pretty much correct. A Lease-to-Own deal can be good, but be careful. Many deals have you put down $5000 or more as a holding deposit that is used for closing costs or to reduce the cost of the property.

Here's how L2O works:

You have bad credit and want to buy a house.
Someone has a house they want to sell in a slow market (or, as in my case, want a renter who will take care of the house and then buy it after 1, 2, or 3 years, or more depending on what is agreed upon).
The seller agrees to sell the house at today's fair market value in the future to you.
You agree to LEASE the property (usually at a higher rental rate, with the extra money used for closing costs), take care of it as if it were yours, and then buy it under the terms stipulated in the OPTION.
If you don't buy it, you loose the money you put down and the extra rent you pay every month.
If you buy, the money you already put down and the extra money you paid every month is used towards the closing costs.

In the timeframe of the L2O areement, clena up your credit. go to www.GoldenRocFinancial.com and buy "Kill Off Your Debt--and LIVE!" to learn how to kill off your debt and improve your credit score so you can easily qualify for a mortgage (you can also pick up the eBook from Amazon.com).

Make sure that you follow all the terms of the agreement so you don't lose your deposit by defaulting on the agreement. We had tenants who did that, and we were very forgiving of their lapses. They ended up screwing us, and screwing themselves.

Have an attorney look at the agreement so you are protected, and don't be afraid to negotiate the terms of the OPTION.