A trend that has only emerged recently – lease to own homes – offers an array of benefits for both sellers or homeowners and buyers or real estate investors. While a buyer gets the advantage of increasing his/her credit score and saving for a down payment as he/she leases to own, a seller gets to rent his/her house knowing that it would sell in a set number of years. As lease to own homes are a viable real estate option, gaining a full understanding of the real estate market and where you stand as a buyer/seller becomes necessary. To help you understand the process, we explain to you this option in detail and present possible pitfalls to avoid.
First, What Are Lease to Own Homes?
A lease to own option allows you to rent a property for some predetermined time and enjoy the possibility of purchasing it at the end of the lease. Lease to own homes, moreover, offer an alternative to a mortgage. To qualify for a mortgage, you have to have a good credit score and cash available to pay for a down payment. A credit score is a three-digit number, ranging from 300 to 850, that depicts a person’s creditworthiness. The higher the score, the more eligible you are to receive a loan to finance your property purchase. If you do not have the cash or the score to qualify for a mortgage, then lease to own homes make a viable option.
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What differentiates standard rental properties from lease to own homes is security. When you rent a house, you pay on a monthly basis to live in it, but you don’t own it. When you lease to own, you pay option money and a monthly rent to live in the house. Note that about 25% of the rent you pay goes to the final purchase price. Option money or consideration money is, furthermore, a lump sum paid to the property seller to secure the home for the period that the buyer is renting it for. The fee usually wavers around 4% of the home value and is not refundable might you not be able to purchase the house. If for some reason you are not able to purchase the house after the lease expires, the 25% of the rent that goes towards the purchase and the option money will be lost. If you are signing to a lease purchase, you may also expect to face legal obligations.
In a lease purchase, the renter will have the obligation to purchase the house at the end of the lease. When you sign to a lease purchase, you are indebted to purchase the house when the lease expires. If you cannot make the purchase, you may be able to initiate legal proceedings. Oftentimes buyers mistake lease to own for lease purchase. It is, therefore, recommended that you hire a real estate lawyer before signing to a contract to help you better understand its wording.
Are Lease to Own Homes a Viable Option for Sellers?
Although lease to own homes can be disadvantageous to those who want to close a deal on a house, they yet remain a viable option for sellers who are facing difficulty selling. When you lease to own your home, you allow for more people to afford purchasing your home. This will result in a higher pool of renters and contracts to choose from. Sellers in addition will generate more profit as they charge higher prices given the adjustments they are making for buyers.
Not only will the seller be earning a monthly rental income, he/she will be comforted that the house has a potential buyer. If a buyer for some reason, however, decides to turn down the purchase, the seller will still earn all the extra cash that the buyer has initially paid. Unfortunately, the seller will have to go through the hassle of re-listing the house and contracting another buyer. On another note, a seller will be more troubled selling the house again in a recession.
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Another disadvantage of lease to own homes is locking in at a price much lower than the market prices. Typically when you sign to an agreement, you determine the price that you would pay when the lease expires. This is something called lock in. When you lock in at a price that’s lower than the market value of that time, you will expect losses. It is recommended that you assess the market and look at housing market predictions before singing to any contract. Perform real estate market analysis, consider the possible outcomes, and assess whether it will be conducive to your trade.
Are Lease to Own Homes a Viable Option for Buyers?
Signing up for a mortgage accompanies certain obligations that a borrower ought to fulfill. When a buyer does not qualify for a mortgage because he/she lacks a good credit score or sufficient cash for a down payment, lease to own homes offer an alternative. With the growing number of millennials entering the housing market, entry-level buyers now constitute a bigger share of the real estate market. Entry-level buyers do not inherently have a good credit score or cash to secure a down payment for mortgage. They, therefore, choose to opt for lease to own homes.
While you will be paying monthly rent, lease to own homes offer you the advantage to improve your credit score. When you pay rent, you consequently improve your score and further become eligible for mortgage. You will also be able to save money during this period and secure a cash payment. Note that the option money and 25% of the rent that goes to the purchase payment will be forfeited, if you decide not to buy the house.
Beware that some events might work against you. Home prices might fall, thus leaving you paying more than the market values. Home issues might arise and cause you trouble as well. Paying for an inspection becomes essential in the very first stages of the agreement to avoid such pitfalls. Make sure to thoroughly understand the housing market and do your due diligence prior to signing to a contract.
Related: Lease to Own Option and its Pros and Cons for Buyers and Sellers
Lease to own homes assist potential buyers with the financial obligations that purchasing a home accompanies. Sellers will also be able to sell faster and gain higher earnings. Both buyers and sellers must be aware of all possible outcomes of lease to own homes. Assess the housing market, consider your options, and talk to a real estate lawyer to help you with the process.
For more information about lease to own homes, visit Mashvisor.