Thinking of Lease to Own?

In this crazy market of foresclosures & short sales there’s another option we’re getting a lot of questions on lately, Lease to Own.

What does it mean??? ”Lease to Own…? Exactly what it sounds like, but not quite as simple as it sounds. You are essentially leasing a property with the “option” to own it…hence the specific OREF form for this is an “Option Agreement”. Here’s how it works. Say you’re interested in doing a lease to own on a $300,000 property, you will first need in most cases a lender to pre-approve you. Next you need to have 1-5% of the purchase price to pay the “option fee” which is non-refundable in most cases. Then you need to figure out what that property should rent for, say $1,500/month. You then need to know the LTV or Loan To Value ratio (how much of the purchase price are you financing, 90%? 80%? etc). Lets say your LTV is 90% so you’re putting down 10%. 10% of $300,000 is $30,000, your option fee is thus $3,000 to $15,000 due up front. Now we need more money on top of that $1,500 lease/rent payment, could be $200 or $2,000 – depends on a lot of variables like what you can afford, what a lender may want to see, what a seller may want etc. The option fee and the additional monies on top of the lease payment each month are both non-refundable in most cases. Why? Because the seller is taking the property off the market and agreeing to sell to you at a price that likely in two years would be a bargain in the hopes that you will be buying it at the end of the lease, you the buyer can walk at anytime but the seller cannot, thus the risk is their’s so to equalize that risk the buyer then risk’s those monies. You walk, you forfeit what you’ve paid towards the down payment up to the point that you walk. Lets look at this in a point by point:

  1. Purchase price $300,000
  2. Option Fee (Lets say 3%): $9,000
  3. Rent/Lease Payment: $1,500
  4. Additonal monies in monthly payment toward down payment: $500
  5. Term: 2 Years
  6. LTV 90%

Now with these numbers you would be agreeing to purchase the property in 2 years for $300,000, making an initial option fee payment of $9,000 on a 90% LTV loan and would be paying $1,500/month rent/lease (notice I’m using rent/lease interchangeably here), then paying an additional $500/month towards the down payment. At the end of 2 years you would have paid $21,000 towards the $30,000 down payment, to purchase the property at 90% LTV you would need to come up with an additional $9,000 and finance the balance of $270,000.

Lease to own options aren’t for everyone and be constructed in many ways. In some cases the seller may not even ask that you connect with a lender for pre-approval but chances are they are counting on keeping that non-refundable option fee…. the majority of lease options never work out.  Do your homework, know what you’re getting yourself into before signing on the dotted line; it could be a perfect fit for you but in my opinion there are very few cases where lease to own options make sense, so just because the term “lease to own” sounds good, be aware. 

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