How They Work and What They Are For
What are lease options?
A lease option is a standard method of transferring property from seller to buyer in a more creative manner that opens the possibility of purchase of a property by a buyer who may not yet be ready to qualify conventionally but, have found a property that they truly love.
Here’s the catch,
The lease option, in essence, is two parts: the lease and the option.
Let’s discuss the option first.
An option, much like utilizing an option in the stock market, is an agreement between the buyer and seller on a set purchase price on a property, for a given period of time, and usually is accompanied by an option fee.
This could be for any amount of time agreeable by both buyer and seller be it 6 months, 12 months, etc.
The option fee is used as the consideration for the option and is usually an amount that makes the time period for holding on to the property worthwhile for the seller.
Make sure that you understand this…
During this period of time, the seller cannot sell the property to anyone else, regardless of any changes in value that may occur.
What encompasses a lease is common knowledge. It is basically the terms, price, and time period that a renter makes with a property owner in which the renter rents the property.
However, when these two are combined into a lease option a condition emerges that makes for a worthwhile situation for both buyer and seller.
The lease option, depending on the individual situation and the agreements made therein, allows for a renter to become a both a renter and a buyer simultaneously.
But, there is more
While still abiding by the terms of the lease, the lease option buyer is afforded the right to purchase the property from the seller/landlord at anytime during the option period.
However, this does not release the buyer from any liabilities set forth under the lease terms.
Therefore a lease option is in essence a “hybrid” of leasing a property and purchasing it at the same time.
It works best in these situations
Lease options become most effective in situations where a buyer may not currently qualify for traditional financing from a bank do to:
- less than optimal credit worthiness
- new employment
- low down payment reserves
- a long-time passed bankruptcy or foreclosure
- in situations where the buyer does not have the cash to purchase a property outright currently but, the preceding conditions will be rectified in the near future.
This allows the buyer to still work with a seller in a situation where they want to move their family into a home for themselves but, do not want to wait until they qualify traditionally or have saved up the cash to purchase the property outright.