How Does a Lease-to-Own Work?

Posted May 21, 2008 in Uncategorized by

My husband and I finally finished looking at all the houses on the market in our area that were even remotely within our price range. We short-listed three and began looking at how we were going to get a loan to buy one of them. With the mortgage industry in financial chaos, lenders are taking a hard, close look at applicants. They’re more than willing to loan on our first choice of a home, however, if we can come up with enough of a down payment to sooth their fears. There’s just one tiny problem. We only have about half of what they would like us to have in the way of a down payment. Fortunately, there is a solution. Our favorite house was just reduced in price and the possibility of a lease-to-own option was raised.

Bingo. Three weeks later and we just started unpacking boxes in our new house. It’s ours, yes, but technically we’re renting it for the next twelve months. At some point before this time next year we will exercise our option to buy it.

So, this is how the process works:

  • First, you’ll make an offer similar to the kind you would make in a straight purchase. They’re asking a certain amount of money, you offer less, they counter somewhere in the middle (if you’re lucky!). With the offer, though, you also submit your intention that this be a lease-to-own. You will fill out papers that look a lot like a standard rental agreement. When all parties agree on the terms, a lawyer will draw up a contract which everyone signs. This means that legally you have the right to buy the house during the time period when you are renting it and the owners can’t sell it to someone else in the meantime.
  • Next, you’ll put down some cash up front which will go toward your eventual down payment. An agreed-upon amount of each month’s rent will also be applied to your down payment. When you exercise the option to buy you will then produce the rest of the cash needed for the down payment on the house. If at the end of your lease you decide you don’t want to buy the house, or can not get a loan for it, then you lose the money you’ve already paid towards the down payment and the monthly rent. That’s the risk.

So, why take such a gamble? Simple. Twelve months can buy you the time you need to make the whole process go smoothly (or happen at all). In twelve months you can finish saving up the money for your down payment and shop for the perfect loan. If needed, you can clean up your credit, too. You also get a chance to test drive your new house and new neighborhood and make sure that it’s all you thought it would be in the first place. It helps eliminate buyer’s remorse because you’ll know a lot more about the quirks and pitfalls of the house you want to buy before making a long-term commitment to it. Think of it like an engagement period. Sure, you can always break off the engagement if you have to. It will be messy and costly, but far less so than ending up trapped in a relationship that’s all wrong for you.

In formalizing the lease to own agreement with a contract, make sure you have a title company handle things. They can ensure that your right to purchase the house is recorded on the title, which helps protect you by preserving a record of your rights in relation to the house.

Not all sellers will agree to a lease-to-own arrangement. However, if you find a house you love and need a little time to make the financial end of the transaction work out, it never hurts to ask. The good news is that right now it truly is a buyer’s market and the longer things continue the way they are, the more desperate—and flexible—sellers will become.

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