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Purchasing real estate with a Lease-Option-to-Buy Agreement


Leasing with an option to buy sounds like terrific ways to purchase a home or condo.  But watch out! You may find yourself losing a lot of money because these contracts are not as easy and low-cost as they may sound.

"Rent-to-Own" or Lease-Option can be explained as an owner's offer to lease his/her property to a prospective buyer while giving the prospective buyer the right to purchase the home on a specific date in the future. The eventual sale price is written into the Lease-Option agreement.  ("Rent-to-Own" is the same thing as the Lease Option method of home purchase.)

How a Lease-Option deal works

Typically,  a large, non-refundable deposit on the property  is required of the prospective buyer when the Lease-Option agreement is signed.  For example, an owner may ask for $15,000 for the option and set a date of one year for the prospective buyer to complete the purchase.  During that one year period the prospective buyer will also have to make monthly rental payments.

Why the substantial deposit?  The owner wants evidence the prospective buyer is really serious.  And the owner wants some financial protection during that period in case the prospective buyer decides to walk away.

All or part of the deposit may or may not apply to the down payment on the home.  This should be negotiated and included in a written contract.

What to watch out for

Now this is where major pitfalls and problems can happen--especially in today's real estate market. 

1.  The ugliest thing that can happen is that the owner stops making  his or her mortgage payments during that year period and loses the home to foreclosure -- without telling the prospective buyer who is living in the home and making rental payments with the intent to buy at the end of the year.

2. If the prospective buyer decides to actually buy the home or condo, the deposit may or may not be applied to the purchase of the home.  And all or part of the rental payments may or may not be applied to the purchase. Make sure these two items are written clearly in the Lease-Option agreement before you sign it

3. At the end of the time period, the comps or appraisals showing the value of the house may end up being lower--instead of higher--than the price agreed upon in the Lease-Option agreement.  And the owner may balk at reducing the sale price for the home. 

4. If the prospective buyer decides not to take the Option of buying the house at this point, the entire deposit will probably be forfeited to the owner.  And the renter will have to move out of the home.

5. Banks have changed their requirements for mortgage loans in the last year -- and they may do it again and again. You may be required to put up 20% to 40% for a down payment and have a high credit score.  Also be aware that banks are now demanding  the lowest appraisals they can find from appraisers.

6. It is important to have professional advice if you decide to enter into a Lease-Option or "rent-to-own" deal.  Choose a real estate attorney or reliable experienced real estate broker to advise you and have them explain every single clause in the agreement--before you sign it.

7.  And never forget--you can negotiate everything in real estate.  Everything!


Take an online tour of the Santa Clarita Valley by visiting these neighborhoods:

Stevenson Ranch    Valencia    Newhall   

Agua Dulce    Canyon Country    Condos


  
Practical advice for first time home buyers.


 






 

 

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