Few buyer’s, low appraisals and tight fisted lenders are encouraging some seller’s to consider “rent-to-own” options in order to sell their property.  

Lease with the option to purchase agreements are effective tools for selling a home.  They are ideally suited for “would be” buyers who have financing issues or don’t have a down payment saved.  But, before you jump in, educate yourself about the pro’s, con’s and the proper way to draft the agreement.

How Does Lease with an Option to Purchase Work? 

• Generally the buyer pays an up-front fee, usually  from $1000 to 5 percent of the sales price.  If the buyer completes the purchase, the upfront fee is credited to them at closing.  If they do not purchase the home, the seller keeps the fee.

• Generally, the buyer agree’s to pay extra rent each month.  The normal rent is used by the seller to pay the mortgage, maintainence costs, etc.  The extra rent is credited to the buyer and lowers the purchase price at closing.

The Pro’s of Lease Options

• Because the typical contract term is typically from one year to 36 months, it gives the buyer ample time to establish job history, correct credit problems or save for the down payment needed to obtain financing for the home.

• During the option period, the buyer can lock in today’s reduced price, yet, continue to look at other neighborhood’s, area’s and properties without fully committing.

• The seller receives cash upfront, the normal rent for the property and extra rent that they can use to offset the costs of ownership.  The seller does not have to refund any money, if the buyer doesn’t exercise the purchase option.

• The homeowner will likely get a tenant that cares more about the property condition than an average renter.  Because the buyer has committed their own money and plans to own the home at a future date, it is likely that they will care more about maintenance, upkeep and paying the rent on time.

The Con’s of Lease Options

• Buyer and Seller need a well written agreement, drafted by a knowledgeable attorney.

• The Buyer can lose their investment.  If they can’t obtain financing by the end of the rental period, they forfeit the cash paid into the deal.  If the buyer falls behind on the monthly payments, they lose the extra rent and money paid upfront.

• The Seller may get the home back, if house prices fall below the agreed upon sales price.   The seller can opt to renegotiate the price, but net profits may be lower than if the property was sold now, versus at a future date.

• Some renter’s have been burned by seller’s who hide the fact they are going through a foreclosure proceeding on the property.   After a period of paying inflated “rent” and upfront fee’s, the seller may lose the home to the lender, in which case the tenant will be evicted and lose all the money paid into the deal.

• Some Seller’s are Foreclosure Scammers.  Some seller’s take the upfront money and run, never to be seen or heard from again.

• If home prices increase, the seller would lose money, if the agreed upon purchase price is lower than the market price.  In the case of home price inflation, the seller may benefit from renting the property now and forgetting the option to purchase in the future.

Thank you for visiting Why 6 Percent.  We have helped thousands of sellers market their property and keep more of their money.  Ask us about our low cost MLS and Realtor.com marketing package for sellers.   We can help you reach thousands of buyers every month for $399.