A lease-to-own house purchase (also “rent-to-own purchase” or “lease purchase”) is a lease combined with an option to purchase the property within a specified period, usually 3 years or less, at an agreed-upon price. The borrower pays an option fee, 1% to 5% of the price, which is credited to the purchase price. The borrower pays rent, and an additional rent premium that is also credited to the purchase price. If the purchase option is not exercised, the buyer loses both the option fee and the rent premium.

As with any kind of financial contract, lease-purchase deals can be structured in such a way that all the benefits flow to one of the parties and none to the other. Buyers especially need to be careful. But lease-purchase plans have a solid economic rationale, which means that they can be structured so that both parties benefit.

Contract Features of a Lease-Purchase

A lease-purchase has 5 major provisions. The sale price of the house and the rent are market-determined, yet subject to negotiation just as in a straight purchase or rental transaction. Buyers often know less about the market than sellers, which places buyers at a disadvantage unless they do some homework, which is advisable.

Buyers generally prefer a long option period because it provides more time to build equity and repair credit. A long period can boomerang on them, however, if they are never able to exercise the option, since they lose the rent premium they have been paying all the while, in addition to the option fee. Sellers generally prefer a short option period, but if it is too short, the house won’t be sold.

The option fee and rent premium are viewed differently by buyers and sellers. To the buyer, they are part of the equity in the house they will soon own. Fully anticipating that they will exercise the option, the only cost is the interest they would otherwise have earned. To sellers, however, these payments are the best guarantee that their houses will sell; if they don’t sell, the payments are retained as income. That the benefit to the seller generally exceeds the cost to the buyer makes the lease-to-own deal a possible win-win. 

Using a Lease-Purchase to Buy

The lease-purchase offers homeownership opportunities to consumers with little cash and/or poor credit, who are prepared to bet on themselves. The bet is that before the option period expires, they will qualify for the mortgage they need to exercise the purchase option. During the option period, they have the opportunity to rebuild their credit and accumulate equity while living in the house.

The development of the sub-prime market, in which consumers with poor credit or no cash can obtain loans, does not seem to have lessened interest in lease-purchase. It is very likely that those who succeed in exercising their option under a lease-purchase do better than if they had financed a conventional purchase in the sub-prime market. The savings in finance costs will more than offset a higher price on the house. But those who can’t exercise their option will lose their bets.

Consumers who need to rebuild their credit rating during the option period should understand that paying their rent on time won’t do it. Rent payment information is not used in compiling credit scores. While Fair Isaac, the company that developed credit scoring, has recently unveiled an “expansion” score based on “non-traditional credit data,” it does not yet include rent payment information from individual home owners. Lease-purchase buyers who need a higher credit score must focus on their credit cards and loans.

Even though it is costly, the right not to exercise the option is of value to buyers. If there is something seriously wrong with the house, neighborhood, or neighbors, the money left behind on a lease-purchase is much smaller than the cost of an outright purchase followed by a sale.

Dangers to Buyers

On October 2, 2005, Bob Mahlburg, an investigative reporter for the Sarasota Herald-Tribune, published an article on a substantial lease-to-own program in Florida that had generated numerous complaints. Over a 5-year period hundreds of deals were executed under this program but only a handful of purchases. In fact, there were more evictions than purchases.

The contract used in this program made it all too easy for the seller to avoid having to sell when it was more profitable to evict the tenant and do another deal with another hopeful buyer. The moral: read the contract very carefully to make sure you are confident you can live up to all the terms, such as paying your rent on time, every time. 

Using a Lease-Purchase to Sell

Most home sellers want a cash sale, but for those prepared to hang on to the property awhile longer, the benefits can be compelling. Bob Bruss, an expert’s expert on lease-purchases, says that in this market, there are always more buyers than sellers – he has been both. As a result, buyers generally pay top dollar, perhaps including some assumed future appreciation.

 To be sure, the deal may fall through, but in that case the seller gets to pocket the option fee and rent premium. The seller also enjoys the tax deduction on his mortgage interest payments during the option period.

 Copyright Jack Guttentag 2007

Tax advantage as long as your mortgage balance is smaller than the value of your house the mortgage interest is fully deductible on your tax return and in the early years of your mortgage you pay mostly interest. Also real estate property taxes paid for a first home and a vacation home are fully deductible.

As long as you have lived in your home for two of the past five years, you can exclude up to $250,000 for an individual or $500,000 for a married couple of profit from capital gains and you don’t have to buy a better house or even buy another house.  There is no age restriction and the “over-55″ rule does not apply.  You could buy a house and sell it every two years and pocket your profit up to the above mentioned limits tax free.  And if you receive more profit than the allowable exclusion upon sale of your home, that profit will be considered a capital asset as long as you owned your home for more than one year. Capital assets receive preferential tax treatment.

Ownership, you own a home instead of helping some investor own the house you’re living or some big company pocket the profit. 

Also a house is a good hedge against inflation with a fixed rate mortgage your monthly payment is the same 30 years from now.  You will be paying the mortgage 20 years from now in todays dollars in the same amount as you do today. 

It can really help improve your credit rating. Owning a home is one of the best investments. It looks good on your credit.  Making your payments on time goes a long way to help raise your credit score.  And you may be able to own your new home through lease purchase home scenario.

Equity gains by paying your mortgage, you are building equity in a place of your own. Equity is the portion of the property that you actually own.  Equity increases with each mortgage payment.  The longer you pay your mortgage the greater the portion of your monthly payment goes toward your mortgage as opposed to the interest portion of your payment which lessens as the mortgage gets older.

Retirement planning is another advantage in two ways. The first option is to keep living in the home that you now own fully.  Paying no mortgage.  Or you could sell the house using some of the money to move to a smaller home.  Using the excess money for expenses.  Or you could get a reverse mortgage on the home that you own. 

There are many advantages to owning a home.  Some of the benefits are intangible, such as pride of ownership, and having a piece of the American dream.

Technorati Tags: home ownership. own a home, rent to own home

With all the new restrictions on mortgages, a lot of would be home buyers are being left out in the cold. If you don’t have a large down payment, good credit or a steady source of income (self-employed this means you) you will have a hard time qualifying for a conventional mortgage. Sellers are feeling the crunch too with low home values possible foreclosure. Both of these groups can be helped through lease purchase homes.

Sellers can benefit by getting people in the home that will take care of that home since they will be owning it in the future. The sellers also benefit by relieving the money strain on themselves by having an income that will, if structured correctly, at the very least will pay their mortgage. When the sale goes through usually no realtors are involved so no sales commission apply.

As a person offering a lease option you must know that the people that are buying from you don’t have great credit. And you must know that the lifestyle that got them into credit problems may not magically change just because they want to buy a home, you must be ready to take back the house at the end of the lease option period. Also if a new buyer comes along and wants to buy the home you can’t sell it because you have entered into a legal contract with your lease purchasers. Also if the home values go up you are obligated to sell at the agreed upon price.

Buyers will benefit through having time to work out credit problems. You will also lock in a sales price at today’s prices (very low) but will buy the house in the future with a down payment already in place. You may very well walk away with a 100% loan when you do buy the house.

Though this sounds great, if in the future the you don’t buy the house the rent credit (which is the down payment) and the option fee are forfeited. If you haven’t worked on your credit, you may not be able buy at the end of the lease, possibly for the same reasons you couldn’t buy at the start of the lease: bad credit, not enough income, etc. Any work that you did to the property will be lost if you don’t end up purchasing the home. Also you must check on the property you are lease optioning to make sure the seller is making the mortgage payments.

Technorati Tags: Home lease option, lease purchase homes, lease to own home

A very interesting article by Carla Barnes.  Use lease purchase homes to put you in a house.  If you must rent why not try rent to own?

With current mortgage forecasts being unfavorable it’s not surprising lease options today are gaining favor.

Lease Purchase Homes is a lease combined with an option to purchase the property within a specified period, usually from 1 to 3 years. The borrower pays an option fee, 1% to 5% of the price which is credited to the purchase price. If the purchase option is not exercised, the buyer loses both the option fee and the rent premium. The option fee is typically charged in exchange for taking the property off the market during the lease and is only a fraction of what a down payment would be.

Lease purchases are a wonderful alternative for people who would like to purchase a home right now, but may need to build up their credit rating or just needing a little more time to acquire a down payment. EOTM Properties has a great deal of rent to own and lease option homes available as well as regular homes for rent in the Atlanta & Surrounding areas.

Below are a few common Lease to Purchase Questions that we hope you find helpful.

1. So what exactly does rent to own or a lease purchase entail?

A standard rental lease allows you to live in the home and there are usually associated move-in expenses such as a deposit and/or security deposit. With lease purchase homes or lease option homes, the “option” agreement gives you the right to purchase the rental home within a certain period of time at an agreed upon price. There is also usually an initial “option” amount due upon signing (similar to a rental deposit) and a monthly additionally payment which applies to the purchase price of the lease option home.

2. I want to buy a home, but not sure if I want to make a commitment because of the market. What should I do?

It is understandable to be reluctant considering the market woes, but consider a lease-option as a long engagement without the commitment. You don’t have to commit to the purchase of the house at the end of the lease period and can walk away if prices have declined or simply if the “chemistry” with the house wasn’t right.

3. Why should I buy through a rent to own program?

Buying a lease option home through a rent to own lease is one way to save for a down payment while you get to enjoy living in the house for lease option purchase. But be sure to fully understand this type of agreement as you must be willing to see the option all the way through and make your payments on time or you could risk losing the right to purchase the home and any additional option amounts you paid.

4. How do I qualify for a lease option home?

The number one qualification is a sincere desire to own a home of your own and a firm commitment to follow through the entire process. We are dedicated to helping our clients understand the entire process and customizing the right plan to fit their needs. Our Professional Group of Mortgage Advisors work directly with you to get a clear plan on what it will take to position yourself for a mortgage at the end of the lease term. This may entail correcting credit issues, pay off bills, save for a down payment, etc. This process can be started by filling out a standard rental application. Get a jump start today.

5. What types of homes do you have available as a lease to option?

We usually have several homes to choose from that are posted on our website. They are homes in great neighborhoods with assorted amenities. If there is not one that meets your needs, we can document the type, location and price of home you are looking for and contact you if one similar becomes available.

Even though this article is written for a specific market, it is applicable nearly every where.  Lease to purchase may be the way for you to move toward home ownership the right way.

Technorati Tags: Home lease option, lease purchase homes, lease to own home