One of the biggest issues for real estate owners is a stagnating property – a property that is not selling at the asking price of the owner. This could be the result of different factors, such as a high asking price, low demand, or an unstable economy. For real estate owners and potential buyers, there comes an investing solution that could benefit both: lease options. It gives the owner a chance to make profit of the investment while renting to a potential buyer. For a tenant, it gives them a lease, but the chance to own their own property after a number of years.
The basic definition of a lease to own option is when an owner gives the tenant the option to buy the property at the end of the lease. Usually the tenant is given a time frame and price at which the tenant has to buy the property. Most of the time, the lease payments can then be applied toward the purchase price. This is a beneficial strategy for buyers because they have the option to continue renting or buying, but the seller cannot sell the property to anyone else should the tenant decide to buy it.
To understand lease options more, it is important to understand the advantages and disadvantages of the agreement to both buyer and seller.
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Lease to Own – Buyer
Advantages
- A lease to own is an exciting prospect for a tenant that is short on cash and unable to qualify for a mortgage. This gives the buyer time to prepare a down payment or improve their credit ratings for a mortgage before the purchase date.
- A purchase price for the property is usually agreed upon at the signing of the agreement. This is a huge advantage for the buyer who will avoid additional costs of appreciation of the property after a number of years of renting have passed.
- Lease to own can act as a trial period for the buyer. If the buyer is new in town or relocating, then a lease to own allows them to test this particular neighborhood as an investment opportunity.
- If the buyer is relocating and waiting to sell a property of his or her own to fund the purchase of a new one, then lease to own is the perfect option. It allows them the opportunity to get settled in at their future home until they are able to purchase it completely.
Disadvantages
- Lease to own does not make the buyer an owner of that property. It will still belong to the seller, which provides him or her with full control over the property. It might be a minor issue but for the buyer, it will feel like being a tenant and not a homeowner.
- The plan might not work out because as buyer you might not be able to improve credit rating or save up for a down payment. This will result in losing out on the property you planned to purchase.
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- Sellers ask for a one-time fee to be paid in return for the buyers’ optional decision on purchasing or not. The fee varies depending on the seller, but if the buyer refuses to buy then they lose that fee to the seller.
Lease to Own – Seller
Advantages
- A lease option agreement with a potential buyer is an excellent investment strategy when you are being faced with too much competition in the market. A lease option is better for buyers than a mortgage payment, which makes it favorable to them.
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- If the seller is unable to sell the house in that moment, then a lease to own agreement will provide a financial opportunity. Instead of having a vacant house, then a monthly fee in the form of rent will be ideal with an option to purchase.
- Unlike normal rentals, a lease to own tenant is more likely to maintain the conditions of your property because of their option on purchasing it eventually. This allows the seller to save some money in repairs and maintenance costs over the years.
Disadvantages
- If the seller is in need of bigger amounts of cash then lease to own won’t help with that. A lease to own functions on rental price ranges for a number of years and that deprives the sellers from their goals.
- The risk of a depreciating property. If the buyer decides to exercise his or her option to not buy then the seller will be faced with selling the same property for a lower price than its original value before the lease to own agreement. The opposite works in the favor of the buyer, appreciation of the property means the seller must sell for less than market value due to lease option agreement.
- The most haunting disadvantage for the seller in lease to own agreements is the uncertainty that comes along with it. Lease options are usually long-term contracts that last for years. If the buyer decides not to purchase then the seller must go through the same cycle of selling the property, which consumes time, energy and money.
A lease to own agreement is clearly an investment strategy that gives more power and freedom to the buyer. Sellers are usually forced into lease options because of their inability to sell their properties at the time. It is not hard to understand the differing viewpoints of lease options after looking at the pros and cons for both parties. If any potential buyer can get their hands on a lease to own agreement, it would definitely be advantageous.
