What is a Lease Option?

Rent Homes to Own in Maple Grove Minnesota

What is a Lease Option (Rent to Own)?

Often the biggest obstacle to becoming a homeowner is coming up with enough cash for a down payment. One way for cash-strapped home buyers to realize their dream is to lease a home with an option to buy.

Here’s how a lease option works. The buyer (called an optionee) leases the property from the seller (called an optionor) for a period of time. The lease contract gives the optionee the right (but not necessarily the obligation) to buy the property at the end of the lease period, or earlier by mutual agreement, at a price agreed upon in the contract.

The optionee pays a sum, called option money, to the seller at the beginning of the lease. This money is applied to the purchase price of the home if the option is exercised. The option money is forfeited to the seller if the optionee doesn’t go through with the purchase. The option money is non-refundable.

Like any contract, the terms of a lease option are negotiable. The length of the lease typically can be 12 to 24 months, but anything may be agreed upon. The amount of the option money, the purchase price and the rent amount per month may also be up for negotiation. Sometimes a seller will agree to credit a portion of the rent toward the purchase, providing an additional incentive for the buyer to go through with the purchase. One thing is certain: during the lease period, the seller cannot sell the property to another buyer!

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Even though the amount of the option money is negotiable, it’s usually less than the down payment amount required to purchase the property following conventional practices. So for relatively little cash up front, a lease option allows the buyer to tie up a property at today`s prices, and live in it before making a decision to purchase. If you`re buying in a market where home prices are rising, a lease option might be a wise choice because you set the purchase price up front.

There are two parts to a lease option agreement. The first deals with the terms of the lease (rent), and looks like a standard lease agreement. The second deals with the terms of the purchase and looks like a normal purchase agreement.

Home buyers who have a house to sell in another location may be able to lease option a home to give them a place to live and time to sell their home. Then they are able to use their equity from the sale to purchase the home they are renting at an agreed price. NOTE: Since you forfeit your option money if you don’t go through with the purchase, don’t option a property that you have no intention of buying.

Owner Financing

Owner financing, simply stated, is a seller willing to help a buyer by financing part or all of the purchase price. Usually, the buyer makes a down payment and the seller will carry a first mortgage, second mortgage or an Agreement for Deed (also called a Land Contract).

Benefits of Lease Option for the Tenant/Buyer

  • Minimum cash may be required up front. Buyers with credit problems will benefit from this purchase method, since sellers may finance you. The method affords you time to repair less-than-stellar credit before you purchase, using a mortgage loan you acquire yourself.
  • You have faster equity growth than if you were just renting, and faster than with conventional financing. Some of your rental or option money is working for you towards the purchase. You may have a lower down payment at closing since you will have option money or rental credits to apply. By the time you purchase, prices may have appreciated beyond your locked-in price, giving you additional equity.
  • Your home buying power is increased, as you now have the ability to purchase using alternative methods.
  • A lease purchase gives you sufficient time to check out all the features and faults of the house. You have time to check out the neighborhood.
  • With a lease purchase, you skip paying closing costs, traditional down payment and other fees normally found in a purchase using conventional mortgages.
  • While you are leasing, you have no taxes or property insurance to pay. Major repairs are normally the owner’s responsibility until you buy the house.

MN Home Rental has single family homes/townhomes available for rent or lease option in many locations. Also, Minnesota Home Rental, Inc. can work with a tenant/buyer to find the home of their dreams in the location of their choice and rent or lease option the home back to them.

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