How the Lease Option Works in Real Estate

It is a bit hard to nail down exactly how the lease option works in Real Estate. A lease option is similar to a knife fight, there are no real rules.

A lease option, or rent to own, type of arrangement is a way to purchase Real Estate on a deferred basis and still get the use of it as home until the deal is concluded. How it works is that you move into the home and pay a monthly rent, but you have an option to purchase the house at a later date. Very simple process, you lease and you have an option. Beyond that the only real rule of lease options is that just about everything is negotiable.

No two lease options are exactly alike because of the ability to negotiate the terms. It is important to remember that in the long run the terms are a lot more important than even the sale price. This makes the whole process somewhat more complicated than a straightforward sale. The terms will have to include such additional matters as the amount of the rent that will be credited toward the down payment and the length of time before the option has to be exercised.

In many cases, the entire rent price will not be credited toward an eventually down payment. Only the amount that exceeds the fair market rental value of the area might be credited. For example, if the normal rent of a similar property is $500 dollars a month, you might arrange to make a monthly payment of $750 with the additional $250 being credited toward the down payment. Of course, this amount is one of those things that can be negotiated.

There are other considerations such as the length of the option clause that must be addressed as well. It is also a good idea to begin the loan application process as soon as possible. The buyer should never wait until the option date nears to do this. There is also a chance the property may go down in value before the option is exercised. This would become known when an appraisal is done. If the appraisal value is below the agreed sale price, this issue would have to be addressed.

There are some people who think that the main reason a seller allows a lease option contract is that he knows his property is overpriced. They also think that the only reason a buyer desires a lease option is that he can not qualify for a regular loan. So, this would be a case of a buyer who is not qualified buying a home that is overpriced. This sounds like a sure recipe for disaster. The truth is that the lease option has its place in the overall arsenal of the Real Estate market. As in all Real Estate transactions, the parties must have a very good idea of what they are doing and what the potential risks and problems might be before they even begin their negotiations.

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