When you have survived a career loss or made it through a foreclosure, it can take a while before you have picked yourself up and dusted yourself off. At that point, you may have been momentarily relieved to find that you have a lot of company. Nevertheless, sooner or later, it’s time to bounce back.
One of the universal hurdles almost everyone in this position faces is how to go about stepping up to secure their next home. One of our local rentals is always a choice, but for many, an unsatisfying one. As always in any other than boom times, cash is king — and if you don’t have it, your options are limited. Today’s would-be buyers who lack funds for a down payment (or have a credit deficit) do sometimes have another alternative: a lease option.
A lease option is essentially two transactions rolled into one. Terms can vary, but commonly a local lease option goes something like this: the tenant pays the landlord an option fee in exchange for the right to purchase the home after an agreed-upon period of time (in our area, often one to three years). During that period, the tenant pays extra rent, which the landlord credits toward the eventual down payment.
Sounds simple enough, right? The landlord gets to take the home off the market, and the future homeowner has solved his immediate cash crunch. His rental feels like his own property, with equity building up…
There are, however, realistic planning details to which both parties should give attention. Too many lease options wind up not ending in a purchase. I think that is because of a failure by one or both parties to realistically take a couple of factors into account.
First and foremost is the buyer’s credit status at the end of the lease option. The tenant has to be prepared to actively use the option period to improve his or her credit and financial profiles. Neglecting that means mortgage lenders will be AWOL when they are needed.
Tenants also need to be prepared to maintain the property. Depending upon the terms spelled out in the agreement, although the landlord may still be responsible for some expenses, the tenant is usually expected to keep the home and yard in good condition; and sometimes also to cover minor repairs. If that turns out to be an expense that wasn’t foreseen, it can lower the property’s appraised value — or cause additional credit problems.
A lease option is a legally binding contract and – like all contracts – should be thoroughly reviewed and understood before signing. As a real estate professional, I am here to assist my clients with important real estate decisions like these. If you are considering buying or selling a home and are considering a local lease option, contact me anytime to go over your choices. Sometimes a solution may be closer than you think!