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What is a Lease Option?  

 

A "lease option" is really two separate but related agreements: a "lease agreement" and an "option agreement".
 

A LEASE AGREEMENT is just a standard agreement to rent a home. In general, a lease agreement gives you the right to live in a home in exchange for payment of rent. Typically, move-in charges to rent a home might look like this:
 

Security Deposit

   $1,000

      (Refundable)

One Month’s Rent

   $1,050

      (Non-Refundable)

Cleaning Fee

   $   250

      (Non-Refundable)

TOTAL MOVE-IN

   $2,300

 

 

An OPTION AGREEMENT is the right to purchase the home within a specified period of time for a fixed purchase price . For example, the option agreement could state that you had the right to purchase the home at any time before March 1, 2004 for a purchase price of $150,000. There would be an initial option payment of $2,000 and, in addition to your rent every month, there would be Additional Option Consideration of $250 per month. Therefore, the total monthly payment might be, for example, $1,050 rent + $250 additional option consideration for a total of $1,300 per month.

 
Although all the option money paid is non-refundable, as long as you arranged for financing with a bank and the home is purchased by the agreed date, all the option money paid applies to the purchase price. The advantage of this option program is that it gives you time (up to 30 month terms available) to save up for the down payment (and time to improve your credit, if needed). In the meantime, your purchase price stays fixed. For example, a 30 month option on a home with a $150,000 purchase price might look like this:
 

Option Consideration

   $2,000

      (Non-Refundable)

Additional Option Consideration:              30 Months @ $250=

   $7,500

      (Non-Refundable)

TOTAL PAID

   $9,500

      (Non-Refundable)

  

This $9,500 is available to be applied to your purchase of the home and represents more than 6 percent of the example purchase price of $150,000. Depending on your credit and other factors which a lender may consider, this amount of cash is generally enough to close on the purchase of the home. (Many lenders have 3% and/or 5% down programs).

 

With a "lease option" agreement, your move-in charges might look like:

 

Option Consideration

   $2,000

   (Non-Refundable)

Security Deposit

   $      0

 

One Month's Rent

   $1,050

   (Non-Refundable)

Cleaning Fee

 $        0

 

TOTAL MOVE IN

   $3,050

 

  

So, in this example, your total move-in would only be $750 more with a lease option than with a standard lease agreement. The additional option consideration of $250 per month would then start the first month after your move-in.

 
Another advantage of the lease option program is that the home price is fixed from the start. This means that if market inflation causes the home price to increase higher than the set price, the bank could consider extra value as your equity towards your purchase of the home. For example, if the purchase price for the option is set at $150,000 (as in the example above) and the home increases in value within the 30 month option term to $154,000, you would be able to buy a $155,000 house and pay only $150,000 for it.

 

NOTE: Lease option agreements are a great way for your to save your way into home ownership, but these agreements are not for everyone. If you move out of the home during the option period for any reason or if your option payments are late, your right to purchase the home terminates. Be certain that you fully understand the terms of the lease option agreement before signing such an agreement. It is important to understand your own commitment and determination to see the option to completion before you begin. However, if you know what you want and are willing to work for it, this is a great way to afford a new home in a short period of time - and to live in there in the meantime

 

Click here for a free lease option agreement.

 

 
 
 
 
1.   What is a Lease Option?
 
 
2.   How do I determine my home's current value?
 
3.   What is a 1031 tax exchange?
 
4.   How do I find and buy foreclosed property?
 
5.   What mortgage programs are available to landlords?
 
 

 

 
 
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