Lease-purchase agreements, also referred to as lease options or rent-to-own agreements, can move you towards home ownership if you aren’t ready to take out (or are unable to qualify for) a mortgage. Under the agreement, you typically pay some money up front and then make extra monthly payments in addition to your rent. The extra money can go towards your previously agreed-upon purchase price when you exercise your option to buy, if the seller agrees to this plan. If you don’t exercise your option, you can lose all of the money you put into the property as you were renting the home.
Setting the Purchase Price of a Rent-to-Own Home
Most lease-purchase agreements have either a fixed price for the house, or define how it can increase or decrease over the life of the agreement. If the real estate market improves quickly, you will have locked in a price, and potential profit, with your option. Furthermore, the extra money that you pay along with your rent every month is usually factored into your purchase by your landlord. When it comes time to buy, you should get a discount equal to what you paid into the account.
Rent-to-Own: Ownership in Limbo
When you do a lease purchase, you can feel as if you are in a strange place relative to your house. You don’t own it, but you also aren’t just a regular tenant. In many cases, you’ll end up paying certain expenses, such as repairs, or even taxes for the house, just as if you owned it. At the same time, you’ll still have to pay a fair-market rent like a traditional tenant even though you aren’t getting the same benefit from your landlord as a traditional tenant would.
Risk of Loss
The biggest drawback of a lease purchase agreement is that you can lose your option money relatively easily. If you don’t buy the house before your option expires, you usually forfeit the extra money you paid to your landlord. Financing the home will require getting a mortgage, so if you chose to rent-to-own because you couldn’t get a loan, you will have to deal with those issues before the option expires. Also, some lease purchase agreements can have provisions that cancel your option — and give the landlord all of your money — if you do something as simple as make a late payment.
Before deciding if a rent-to-home option is right for you, be sure to research the real estate market and mortgage rates diligently. If this is the first time you’re applying for a mortgage, check with your lender first so you don’t waste your time or money investing in a home during the lease if the plan goes awry.
About the Author
Solomon Poretsky has been a writer since 1996, with experience in the fields of financial services, real estate and technology. Poretsky holds a Bachelor of Arts in political science from Columbia University.
This article is provided for general guidance and information. It is not intended as, nor should it be construed to be, legal, financial or other professional advice. Please consult with your attorney or financial advisor to discuss any legal or financial issues involved with credit decisions.
Published by permission from ConsumerInfo.com, Inc. © 2013 ConsumerInfo.com, Inc. All rights reserved.