Is Lease-to-Own a Good Way to Buy a House?
NEW YORK ( MainStreet) Lease-to-own is something you do with furniture, not a house, right? Not necessarily. Although most people who buy houses do it the old-fashioned way, with a down payment and a mortgage, lease-to-own deals are also common in residential real estate.
Leasing to own attracts buyers who can handle a monthly payment but lack a down payment. It can also be good for people with bad or no credit, as well as people who want to give a particular house, school system and neighborhood a test drive without committing to a big down payment and 30-year mortgage. And if you believe local home values are headed up, it can be a low-risk way to lock in a price now before it gets more expensive.
Lease-to-own, also known as a lease option, requires thinking outside the box. But it can make homeownership a reality today for people who might otherwise be paying rent for years. If the owner is willing, renters may even be able to lease-to-own the place they're staying in now, as well as any other rental. "Every for-rent sign you see potentially can be a lease option situation," says Eric Lloyd, a real estate coach with Salt Lake City-based Professional Education Institute.
Basically, a lease option calls for you to pay a little more than the monthly market rent. The extra is applied to a future down payment to purchase the property. For instance, if the market rent is $1,000, you may pay $1,200, of which $200 is credited the down payment. In addition, you may be asked to pay an option fee of 1% or so of the house value.
The amount of the rent and credit are obviously critical items, as is the price at which you will eventually purchase the home - not to mention the duration of the agreement. You should have the house inspected and do a market analysis before agreeing on a purchase price. The lease-to-own contract may specify a term from a few months to a few years, during which time you'll be able to buy the property for the agreed-upon price.
The way it works is, if you pay $200 above the market rent toward a down payment, after three years you would have $7,200 for a down payment. This lets you buy now, at today's prices, instead of after you've saved up for a down payment. Another plus is you don't have to qualify for a mortgage right now, giving you time to repair or establish credit. Without making a big upfront down payment, the buyer has less to lose if the market goes bad. Finally, the seller still pays for repairs and maintenance, as well as insurance and taxes.