Tips on using lease to own option for buying homes

According to an article in the Denver Post, Tim Walsh of Confluence Property Ventures indicated that Lease To Own (or Rent To Own) homes will become more and more popular in this market due to current, excessive restrictions on home lending and I think he’s probably right.

Lease to Own doesn’t always have the best reputation for a variety of of reasons: the signs drawn with black marker posted at intersections don’t help… (you think I’m kidding?!), plus in the years of easy lending they simply weren’t needed by many buyers, and buyers don’t often understand the implications and the actual legal agreement when it comes to the lease to own option.

In general (understand that every agreement is different and you must read it carefully!) a lease to own basically states that you put a certain amount of money down, then you pay a certain amount each month to live in the home (just as you would rent or a mortgage) and if you decide to buy the home (exercise your option) at the end of whatever term you’ve agreed to, sometimes part of the down payment and monthly payments will go towards buying the home.

If you’re serious about actually wanting to purchase the property in the future, consider spending a few hundred dollars and having an attorney look over the terms of the contract. If there are terms with which you aren’t entirely agreeable or you would like to see more attractive terms, present a counter offer to the seller. Some home sellers are now offering a lease to own option on their home, because they are anxious to have someone else paying the mortgage and would be more than willing to work with someone who is reasonable.

Understand that if you decide not to exercise your option at the end of the term, you will lose not only your down payment but any monthly payments you have paid. Granted, this is a lot like renting but you lose the down payment as well.

You should be saving money on the side the entire time, so that if you do decide to buy the home you’ll be in a better position to qualify for a mortgage, to continue paying for the house once you’ve officially purchased it.

Understand that the purchase price is often a little higher than market value. The reason is, you’re likely not the most attractive buyer in the world credit wise and you are paying a price for this. Sometimes you and the seller decide on a price beforehand, and lock it in, and sometimes you agree to buy it for market value in the end. Note that a lender would not be willing to lend you more than the home is worth in this tight credit market.

You may be better off renting the smallest property you can stand and socking away money on the side, so you can offer a larger down payment on a more traditional mortgage which may allow a lender to overlook poor credit.

The seller usually treats a lease to own property as if it’s yours which means you are responsible for upkeep and maintenance, taxes and insurance.

Remember the key to ANY binding legal agreement is reading and understanding its terms. Whether it’s a mortgage refi, or a lease to own, an HOA, or even just a standard rental agreement. READ IT. And if you don’t understand it ask for help. Don’t sign things you haven’t read. Got it!?

photo credit: quinn.anya