Buy or Lease/Option?

Question

Survey- would you agree to a lease option on a property you want to live in, even if it means paying $300/month more than rent-going toward the principal?

Answer 1

Hi,
It depends on your situation. If your credit could use some improvement, it might be worth it to take an option for a year, clean up your credit and get a better interest rate. Also, depending on the sales price of the house, the extra $3,600 towards the down payment might help on your loan to value ratios. If the market in your area looks like it is improving, you can tie up the property at today’s value and the increase in value will be reflected when you exercise the option. The other plus for a lease option is that some lenders will write the mortgage as a re-finance, not a brand new loan, and that will help you save on the interest rate and make the loan easier to get (hypothetically -- no loan transaction ever seems to go smoothly).

The down side: The seller could rig the paperwork to make sure you can’t possibly exercise the option -- adding in penalties, for instance. Also, he could be inflating the price because he is offering the lease option to you. Get a valid appraisal -- don’t use his. The property values may drop in a year which means that you may not want to exercise the option and you would lose your option money and the $3,600 in extra rent that would have been credited. If the property values drop, you may be able to re-negotiate the price.

So do your due diligence on the seller as well as the property. I know investors with very good reputations, but they will still shave you in a deal. I know others who will bend over backwards to cut you a break. So, a lot of different factors.

Best of luck to you,

Barbara
www.therealestatebirddog.com

Answer 2

In general, most people that are marketing something as lease with option to buy feel that they are in the driver's seat in the transaction.

Why? Because if the person coming to them wanted to buy the property, they would do it outright at the beginning. So the seller marks up the price of the property to at or above market levels and agrees to the lease option plan of applying $xxx a month to the purchase. The buyer, who is probably in this position because they don't have good credit right now or no down payment, thinks it is a good idea because they can at least convince themselves that they are "purchasing" the home. However, too many times, things don't go perfect during the year and the buyer can not execute the option to buy. At that point, the seller keeps any upfront money and all money applied during the year.

Therefore, it is not a good way to purchase a home. Why pay a seller extra money on a house that you selected from a limited pool of homes that are lease-option? You would be much better off saving the $xxx per month to have for a good down-payment and then going out across the entire market when your credit is better and the down payment is built-up.

I will not say that no lease purchase should ever be done. I am sure that some people could write in and describe how a particular situation worked out in their exact case. However, for ever 1 of those good outcomes, there are at least 9 outcomes that worked out very poorly for the buyer.

So, my answer would be no.

Answer 3

It depends on the real estate market where I lived. If prices are stable or increasing, then yes. However, if prices are increasinig I would exercise the option sooner rather than later.

If the market is going down, I would only enter into the option carefulley. If, after careful study, I thought the market would turn around prior to the last day I could exercise the option, then I would agree to it, but only so long as I thought the market would stop falling before I had to exercsise the option.

Answer 4

I would NEVER get involved with a lease/option agreement. They tend to be fraught with problems, and many times do not come to fruition. If I could not afford to buy the property outright, I'd simply walk away.