Posted by Kim Adamof on Thu, Jan 01, 2009 @ 10:11 AM
So you found a great home to buy only to find out your credit needs a little help in order to qualify. Tightening credit guidelines are affecting many would-be homebuyers right now. This combined with sellers struggling to get their home sold makes for a great opportunity to use the lease with an option to buy, or simply lease option.
Here are some tips to help you structure a lease option.
As a buyer, can you afford the option money? The option money or option fee is required for a lease option contract to be valid. This upfront payment is negotiated between the buyer and the seller and usually depends on the length of the option period (or how long before you can buy), typically 12-24 months, or a percentage of the sales price. All of this money should go toward the purchase price or down payment on the home if the buyer decides to buy at the end of the option period. Keep in mind this isn't a security deposit so the buyer can't get it back if they cannot qualify for a mortgage or decide to not purchase the home.
Use two different agreements to create this situation. Consult with an attorney instead of downloading forms off the internet. First, a standard North Carolina Offer to Purchase and Contract has an Alternative 2 section designed for an Option Contract. It gives the legal terminology necessary to create the option period and option fee. Second, establishing a regular rental agreement creates the "lease" between the buyer and seller. The Offer to Purchase and Contract protects the buyer's claim on the title against other claims and liens. The lease agreement protects the seller should the buyer not purchase the house.
As a seller, take a security deposit. A security deposit, even if it is a small amount, helps to legally maintain the landlord/tenant relationship. If the tenant hesitates at paying a security deposit and an option fee, reduce the option and put that money toward the security deposit. That way, if the tenant doesn't exercise the option, there will still be an incentive to keep the property up.
Don't give large rent credits. In the past, lease options were offered to buyers with two ways to pay the rent. Pay a higher than normal fair market rental amount each month and receive a credit at closing. The difference between the fair market rent and the amount paid each month was given back to the buyer as part of their down payment. This can create a problem with equitable title issues. It's suggested now to only pay fair market rental amounts. If you absolutely must offer a rent credit, keep it small.
Keep good records. Buyers need to make note of payments made and expenditures during the option period. Both buyer and seller should keep a written record of everything that is agreed on. Written documentation helps the tenant/buyer to prove the lease option's validity when applying for a mortgage at the end of the agreement.
Apply for the loan early. Buyers shouldn't wait until the last minute to apply for a loan either. Begin the loan process no less than 45 days in advance of the end of the lease, and to be safe you should probably start a full two months or more before you need to exercise your option to buy. A lease option might qualify you for a refinance loan with some lenders, and these are usually cheaper and quicker to process than new purchase mortgages, but in any case, it's essential to have a mortgage ready to close on the home by the date specified in the lease option contract.
The Buyer/Tenant doesn't have to buy the property under a lease option, but the seller/landlord does have to sell (at the agreed upon price in the contract) if the buyer/tenant fulfills the contract and exercises the option to buy.
Have a Home Inspection. About a month prior to the option period expiring, the buyer should have a professional home inspector check over the house. Buyers can negotiate with the seller, as in a regular sale, for the repairs to be done prior to closing. With FHA and VA financing, seller's can be required to make certain repairs in order to sell the house.
Overall, lease options are a creative alternative for a seller and buyer that are having difficulty finalizing a sale in today's trying real estate market.
This article offers general guidelines and is not intended to replace professional financial or legal advice.