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What
is a Lease Option?
A
"lease option" is really two separate but related
agreements: a "lease agreement" and an "option
agreement".
A
LEASE AGREEMENT is just a standard
agreement to rent a home. In general, a lease agreement gives you the
right to live in a home in exchange for payment of rent. Typically,
move-in charges to rent a home might look like this:
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Security Deposit
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$1,000
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(Refundable)
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One Month’s Rent
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$1,050
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(Non-Refundable)
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Cleaning
Fee
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$ 250
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(Non-Refundable)
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TOTAL
MOVE-IN
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$2,300
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An
OPTION AGREEMENT is the right to
purchase the home within a specified period of time for a fixed
purchase price . For example, the option agreement could state that
you had the right to purchase the home at any time before March 1,
2004 for a purchase price of $150,000. There would be an initial
option payment of $2,000 and, in addition to your rent every month,
there would be Additional Option Consideration of $250 per month.
Therefore, the total monthly payment might be, for example, $1,050
rent + $250 additional option consideration for a total of $1,300 per
month.
Although all the option money paid is non-refundable, as long as you
arranged for financing with a bank and the home is purchased by the
agreed date, all the option money paid applies to the purchase price.
The advantage of this option program is that it gives you time (up to
30 month terms available) to save up for the down payment (and time to
improve your credit, if needed). In the meantime, your purchase price
stays fixed. For example, a 30 month option on a home with a $150,000
purchase price might look like this:
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Option Consideration
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$2,000
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(Non-Refundable)
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Additional Option Consideration:
30 Months @ $250=
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$7,500
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(Non-Refundable)
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TOTAL
PAID
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$9,500
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(Non-Refundable)
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This
$9,500 is available to be applied to your purchase of the home and
represents more than 6 percent of the example purchase price of
$150,000. Depending on your credit and other factors which a lender
may consider, this amount of cash is generally enough to close on the
purchase of the home. (Many lenders have 3% and/or 5% down programs).
With
a "lease option" agreement, your move-in charges might look
like:
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Option Consideration
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$2,000
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(Non-Refundable)
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Security Deposit
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$ 0
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One Month's Rent
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$1,050
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(Non-Refundable)
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Cleaning
Fee
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$ 0
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TOTAL MOVE IN
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$3,050
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So,
in this example, your total move-in would only be $750 more with a
lease option than with a standard lease agreement. The additional
option consideration of $250 per month would then start the first
month after your move-in.
Another advantage of the lease option program is that the home price
is fixed from the start. This means that if market inflation causes
the home price to increase higher than the set price, the bank could
consider extra value as your equity towards your purchase of the home.
For example, if the purchase price for the option is set at $150,000
(as in the example above) and the home increases in value within the
30 month option term to $154,000, you would be able to buy a $155,000
house and pay only $150,000 for it.
NOTE:
Lease option agreements are a great way for your to save your way into
home ownership, but these agreements are not for everyone. If you move
out of the home during the option period for any reason or if your
option payments are late, your right to purchase the home terminates.
Be certain that you fully understand the terms of the lease option
agreement before signing such an agreement. It is important to
understand your own commitment and determination to see the option to
completion before you begin. However, if you know what you want and
are willing to work for it, this is a great way to afford a new home
in a short period of time - and to live in there in the meantime
Click
here for to access rental forms and agreements.
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