Lease option deals – also known as “rent to buy” or “lease with the option to buy” – are essentially agreements in which a tenant or investor leases a property from a seller with the option to purchase when the lease expires, or at any point within the duration of the contract.
In this arrangement, the tenant or investor claims the option to buy by paying a fee, which usually ranges between 3 and 5% of the property value. Although having obtained the exclusive right to buy, tenants are not obligated to exercise this right and can always change their minds, unlike sellers, who do not have this option. Lease terms are negotiable but usually last between one and three years.
Coming to a Lease Option agreement has several advantages for both tenant-buyer and seller, but there are also some disadvantages that should not be overlooked.
Advantages for the Buyer
Lease options can be a great choice for people that do not qualify for a mortgage. They provide tenant-buyers with the opportunity of locking in a sale price before a purchase and thus, buys them the time they require in order to improve their credit ratings and save up for a down payment.
Considering that most lease option contracts are made to set a fixed purchase price in advance, the buyer might benefit greatly from the appreciation of the property during the lease period and thus, might be able to buy it for a considerably lower price than the market value at the time of purchase. In addition to this, a higher lease payment is often agreed upon beforehand, with a part of the amount credited towards the purchase price. Should the tenant-buyer decide to exercise his or her option, these payments will have reduced the overall purchase price.
The Lease Option can also act as a trial period and allows the potential buyer to assess an area or neighbourhood as a living or investment opportunity.
Disadvantages for the Buyer
Some of the advantages listed could also potentially turn into disadvantages. If the tenant does not manage to qualify for a mortgage during the lease term or to save up any money, the higher payments made towards the purchase amount are lost and will not be reimbursed. The same goes for the option fee that was paid to reserve the right to buy. Furthermore, in the event of a decrease in property value, the seller might insist on the agreed-upon price, which would result in the buyer overpaying compared to the market value or losing out on the property entirely.
Advantages for the Seller
Coming to a lease option agreement can be very beneficial to a landlord when the market is slow or there is too much competition, which makes selling difficult.
Therefore, receiving monthly payments is still better than a vacant house, and if the tenant decides not to exercise his or her option to buy, the seller will be able to keep the potential extra fees made towards the property purchase, if such extra fees apply to the particular agreement. In addition, he or she will also be able to retain the option fee.
Another advantage is the fact that Lease Option tenants are likely to take better care of a property, since they have moved in with the intention of eventually buying it. So even if they ultimately do not end up purchasing, the seller could save a lot of money that would otherwise be spent on maintenance and repair costs.
Disadvantages for the Seller
Great advantages for the buyer can be great disadvantages for the seller: if market fluctuations increase the value of the property beyond the agreed-upon option price, the seller will be forced to give it up at a lower price than the current value. Therefore, it is always advisable to set the price higher to account for potential appreciation.
Ultimately, one of the biggest disadvantages concerning such arrangements might be the uncertainty that comes with them – if after years of leasing, the tenant or investor decides not to buy, the seller will need to invest energy, time and financial resources into finding a new buyer and going through a similar process.
In general, a lease option agreement binds the seller, but not the buyer, who always has the option of opting out at the end of the lease term. But it can be a great option for both if circumstances and benefits are considered carefully.
If you’ve still got questions about Lease Option agreements, please do not hesitate to contact the team at Pick My Pad estate agent, Worsley, who will be happy to explain whether you would be suited to such an arrangement. We have branches across the North West, in Liverpool, Salford and Bolton and we are members of ARLA and NAEA Propertymark, which means we meet higher industry standards than the law demands. Our experts undertake regular training to ensure they are up to date with best practice and complex legislative changes so they can offer you the best advice. We are also backed by a Client Money Protection scheme which guarantees your money is protected.