Lease Purchase Option
The lease purchase option is a terrific tool for homebuyers that simply cannot qualify today for a low interest rate loan. It is indeed one of the simplest and most widely used vehicle to buying a home without using conventional finance venues. What are some of the advantages a lease purchase option may provide you as a prospective home owner?
- In lending, a properly executed lease purchase agreement is treated as a refinance which can readily be done after 12 months of on time payments.
- It provides you the opportunity to “try before you buy”.
- It allows a prospective home buyer to “Control” the right to ownership of a property rather than just ownership itself. This allows you to either sell the property for financial gain or, exercise the option for outright ownership.
- Potential lower costs to closing via refinancing versus a purchase transaction.
- May eliminate the need of a down payment to achieve ownership.
This process does not mean you should neglect to, nor will you have no need to, address the issues which are preventing you from qualifying today. What it offers is an industry acceptable alternative to establishing your ability and willingness to pay a mortgage note while you address issues currently preventing you from qualifying today.
This topic does not attempt to address the “investor” benefits, and as a first time home buyer, it is highly discouraged until you have experienced and understand the full realm of responsibility associated with home ownership. This can only be achieved through actually owning a home for an extended period of time.
So how do you use this technique? There are two distinctive methods using the same process. Both are exceptionally easy to execute. However, there are things you need to do before beginning.
First, consult with an attorney concerning the proper lease purchase documentation you’ll need to use for your state, in addition consult with them before signing any document. For a lease purchase to be considered in a refinance as “owned property” the deed must change hands. Though in many instances a underwriter will “over look” a property where the deed has not changed hands, in cases that are “marginal” you can bet they will use this as an excuse to decline your loan.
Understand that purchasing/leasing a property is no different than any other real estate transaction. It has risks. You should not neglect getting an appraisal done to insure the value is supported in addition to having the properly inspected to insure no significant costly repairs are needed. You must be able to meet the payment requirements of the lease. Do not fail to account for Property Taxes, Insurance or HOA’s when calculating the cost of ownership. The most opportune property is one in which the present owner is in “Default”.
For those with a down payment, you can simply look in the for sale by owner and find properties being sold by investors offering lease purchase options. Typically you can expect to need 3 to 5% to put down on the contract. Insure you have your attorney review all documents, before you sign anything or transfer any funds.
For those without a down payment, or even those with, you can use the same technique that many investors use. Place an advertisement in your local papers offering to buy a distressed home. Then screen and negotiate until you have found a home seller willing to allow you to simply “Take over payments” using a lease purchase option. Typically, this process will require $5.00 to execute the lease purchase option and possibly require you to bring past due mortgage payments current.
Both techniques work and are very simple to implement. The same principles you would apply to purchasing a home using standard finance methods should be applied beginning with affordability; “Can I afford the home” and ending with; “Is the home worth what I am paying.”
Both techniques require you to work hard to achieve your goal. However, I once worked with an investor in Lakeland, Florida who purchased 25 properties a year with over 100 “rolling” properties in inventory, using the second technique. The same investor used the first technique to sell the properties.
Happy House Hunting!