lease option

Hi 256bw

You have a fixed period lease of the property so you can/(must) occupy it, and stapled to that is an exclusive option to buy the house at a fixed price for a period into the future. You pay a fee upfront for the option -varies but around 2-4% of the price of the house possibly.

Meanwhile, part of each rental payment you make will be credited/deducted off the price of the house if you exercise your right to buy it and pay the owner out (normal contract of sale at that point). For this reason, payments are higher than normal rental payments.

Under the option you will be responsible for maintenance and for reimbursing the owner for rates and insurance.

The period of the lease is usually matched to the period for which the option is valid, say 5 or 6 years but it is entirely up for negotiation.

Pros IMHO:

You lock in a price today that you have to pay for the house later so you have certainty.
The option fee is usually deducted off the price if you exercise the option.
You occupy it and so don’t have to move, nor have a traditional landlord etc.
You control maintenance and can make sure the value of the property is preserved, or even enhanced if you do work on it before you buy it.
Bankrupts can secure a property whilst waiting till their bankruptcy period is discharged/concluded, (provided they have income etc).
When you qualify for a loan you can simply exercise the option and buy the house.
Usually you can renew the whole agreement for another term if you get to the end of your lease/option period.
It’s like a forced saving program to build up a deposit or synthetically pay off a house and enjoy living in it at the same time.
If the market value of the house goes up to mroe than the option price you collect the capital gain or sometimes split it with the owner depending.

Cons might be:

You need the option fee upfront.
If you choose not to exercise the option (either by defaulting on your payments and thereby invalidating it or just deciding not to buy) the option fee is non-refundable.
If the market doesn’t improve over the period of the lease and the value of the house is lower than the price under the option when you want to buy.
You can’t get a loan later on – although you could renew the agreement for another term, sell the option, do a deal with the owner to sell and split the profit etc.

Just my $0.02

Cheers

Skippygirl [biggrin]

256bw,

1. You have a contract. It’s a long term lease and the mortgagee will probably step into the owenr’s shoes and collect the rents/profits. Having possession of the property should also give you some leverage to enforce your option contract.
2. Yes they can as you haven’t bought it until you exercise your option. Any landlord can refinance their property whilst you rent it can’t they?
3. Yes.

Cheers
skippygirl