3Tips for Tenant-Buyers with a Lease to Purchase Option

A lease to purchase option is a contract that allows the tenant to eventually purchase the property he or she rents, provided the tenant meets certain conditions. They are usually offered in rental homes and condominiums. The lease to purchase option opens up the possibility of home ownership to renters with credit history that disqualifies them from conventional home mortgage loans. In the wake of the 2000s housing crisis, the lease to purchase option gained popularity as many home and condominium owners found themselves unable to sell their properties on the market. The lease to purchase option allows such property owners to earn some extra income while they wait until the tenants buy their property.

Understanding Lease to Purchase Option

The lease to purchase option is signed along with the lease. Under its terms, the buyer agrees to give the tenant a right to buy the house after a certain number of years (usually between 1 and 3 years), and the prospective buyer agrees to be a tenant until that time is reached. The rental payments are partially applied towards the purchase of the house, and the rent remains the same throughout. The buyer also has to pay an option fee, which essentially works like a security deposit. If the buyer winds up purchasing the house, the option fee goes towards the purchase price. If he or she doesn't, the property owner keeps the fee. The option fee can be no less than 1 percent and no more than 5 percent of the purchase price.

Check the Local Lease to Purchase Laws

The laws regarding the lease to purchase options vary from state to state. In some cases, cities and counties institute regulations of their own. Before the buyer signs the contract, he or she should check those laws and, if possible, consult a real estate lawyer.

Understand What You Are Getting Into

A lease to purchase option should not be confused with a lease purchase sale. While the two have many similar features, they have one critical difference. With the former, the buyer is not obligated to actually buy the property, while with the latter, the purchase is legally mandated.

Figure Out the Housing Price First

When the purchase option is signed, the potential buyer and the proper owner must decide how much the buyer should pay for the property. They have two choices--a price at the time the contract is signed or the price at the time the buyer actually purchases the house. Both options have their benefits and drawbacks. With the former, the buyer gets the security of knowing exactly how much money the house will cost. However, if the house prices go down by the time the buyer can purchase the property, he or she may regret spending more money than he had to. Buying the house based on its value at the time of purchase avoids this problem, but it also puts the buyer at a disadvantage should the value suddenly go up.

In the end, each buyer must decide which option works best for his or her particular circumstances and how much risk he or she is comfortable taking. The buyer should also take the time to research the local area real estate prices and real estate trends. That way, he or she will be able to make a more informed choice.