Lease Purchase - the smart way to buy a home

Rent-to-own offers significant advantages for both buyer and seller in today's housing market

Lease purchase, also known as or rent-to-own or lease option, is a very popular way of buying a house without having to meet the strict qualification criteria laid down by lenders.

In 2006 and 2007 virtually anyone with a pulse was able to qualify for a loan, including the 80/20 loans that have left so many people in trouble today.  But with the tightening of credit and qualification rules, and the impact of the unprecedented levels of foreclosures, people are once again going to find that conventional home ownership is out of their reach – at least temporarily.

Although there were undoubtedly people who took advantage of the lax borrowing criteria, not to mention the mortgage fraud prevalent in some areas, in the vast majority of cases of people who suffered a foreclosure, they were good people who got into a bad situation.  Their credit has been severely damaged (a foreclosure can be as much as a 250 point reduction) and their prospects of qualifying for a new home loan in the short term are slim to none.

So what are these people going to do?  One answer is obviously to rent a house while they pick up the pieces of their lives and try to get back to normal.  But that means paying the landlord’s mortgage rather than one of their own.  A better solution for many people is to rent with an option to buy.

In this scenario, the would-be home-owner rents a property and has a separate agreement providing them with the option to buy the home at a stated price at some time in the future.  For example, they may have an option to buy the house at $250,000 within 2 years of the signing of the agreement.  (The purchase price may be a little over current market value to cover potential appreciation during the period.)  For this they would put down a non-refundable option payment of about 3% of the house value ($7,500 in this example) and be paying a rent of maybe $1,800 a month.  The rent could include an option credit of $300 a month.  What this means is that, subject to some criteria, such as maintaining the property in good condition, and paying the rent on time every month, if the option to buy is exercised, a credit of $300 will be given for every month the rent was paid.  To see how this works out, let us assume that the option to buy is exercised after 18 months – that should be long enough for the renters to fix their credit to qualify for a loan.

After the 18 months, the purchase price would be $250,000 minus the initial deposit, and minus 18 times $300 – another $5,400, making the net price $237,100.  In addition to the lower price, there are a number of lenders that will consider this transaction a refinance (after at least 12 payments have been made), rather than a new loan, with consequently easier qualification and no need for a formal downpayment.  This is obviously a very attractive proposition.

A lease purchase offers advantages to both the buyer and the seller.  The buyer gets to move into a home they want to buy, with a minimal downpayment, and has an exclusive right (but not obligation) to buy the house within the stated time period.  They do not have responsibility for major repairs or maintenance, and don’t have to pay property taxes.  Yet they still benefit from any appreciation in value in the time before they exercise their option to buy.

The seller benefits because they get their asking price for the property, and save on real estate agency commissions.  They also get someone who has a vested interest in looking after the property, as it will probably be theirs one day.

For both parties the transaction cuts out the prolonged period that conventional lenders need to approve loans – often up to three months, and eliminates closing costs for both sides.  The buyer’s closing costs are usually about 3%, so that can be applied as the option deposit instead.

So, whether you are someone wanting to sell your property quickly, for full price, in a stagnant market, or someone wanting to buy a home, with minimum qualification criteria, and a low downpayment, lease purchase might provide just the answer you are looking for.