| Buying a home can be a satisfying or frustrating | | | | down payment, but are not saddled with a home |
| experience depending how financially ready you | | | | that cannot be sold. However, at the same time, |
| are to own a home. Buying a home can be very | | | | if the home increases in value, because the |
| expensive with the major expense of purchasing | | | | purchase price is set, you can purchase the home |
| a home being the down payment and mortgage | | | | for less than it is worth on the open market. This |
| fees. These costs are intended to pay the fees | | | | key element makes lease option homes |
| necessary to get the mortgage setup and | | | | potentially a great investment, because you can |
| generate some equity in the home to hedge the | | | | leverage your money with such little risk. For |
| risk the bank is taking. In years past, this down | | | | example. If you purchase a $300,000 home with |
| payment could be very small, but with the fall of | | | | a mortgage, you would need to bring about |
| the housing market in 2006, those days are long | | | | $20,000 at closing ($15,000 as a 5% down |
| gone, making it prohibitively expensive to buy a | | | | payment and $5000 to cover mortgage fees). If |
| home. When there are fewer buyers and less | | | | the home's value increased 5% over two years, |
| credit around, sellers begin to offer other ways to | | | | the home would be worth $315,000. Your |
| sell their home. The "Lease Option" is one such | | | | $20,000 turned into $30,000 ($15,000 in equity to |
| method. A Lease Option is technically a lease | | | | start + $15,000 in appreciation); a 50% return on |
| (rental) with the option to purchase. You are | | | | your money over 2 years. However, if the home |
| renting the home but have the right to purchase | | | | decreased 5% in value, the home would be worth |
| the home at anytime during the rental period at a | | | | $285,000, and your $20,000 investment turned |
| pre-determined price. | | | | into $0.00. However, if the same home was |
| A lease option can be a very favorable way to | | | | bought as a lease option, then $5000 down would |
| purchase a home because it provides the | | | | turn into $20,000 ($5000 in equity to start + |
| advantages of home ownership without the | | | | $15,000 in appreciation); a 400% return on your |
| disadvantages of ownership. The main advantages | | | | money over 2 years. If the home decreased 5% |
| include: (1) No mortgage fees (2) less for a down | | | | in value, the home would be worth $285,000 but |
| payment (3) limited risk if the value of the home | | | | you can walk away having only paid the upfront |
| falls but you profit as the home appreciates. | | | | down payment of $5000. In this example, the |
| When structured property, there really are no | | | | lease option reduced potential profits by 75% and |
| disadvantages to a lease option relative to | | | | increased potential returns by 350%. |
| purchasing the home with a mortgage. When | | | | 5. Disadvantage: Pay more money upfront. |
| compared with renting, the major disadvantages | | | | Typically a lease option requires a greater amount |
| of a lease option include: (1) pay more money | | | | of money upfront than renting. This is not always |
| upfront than renting (2) you are responsible for | | | | the case and depends on how desperate the |
| repairs, not the landlord. Each advantage and | | | | seller is the lease the home. Generally you can |
| disadvantage is discussed in greater detail below. | | | | expect to pay twice what you normally would put |
| 1. Advantage: No mortgage fees. Because a lease | | | | as a deposit on a comparable rental. |
| option is technically a rental, the agreement is | | | | 6. Disadvantage: Responsible for repairs. One nice |
| between you and the seller. Because the bank is | | | | thing about renting is that the landlord is |
| not involved, there are no bank fees, meaning | | | | responsible for repairs. In a typical lease option, |
| that you don't have to come up with the $5000 | | | | you are entirely responsible for maintenance of a |
| to $9000 that it costs to get a mortgage. | | | | home. |
| However, eventually you will have to get a | | | | There are both advantages and disadvantages to |
| mortgage if you decide to stay in the home long | | | | buying a lease option. When compared with the |
| term. | | | | buying the home with a mortgage, there is really |
| 2. Advantage: Less for a down payment. Like the | | | | no disadvantage and when compared with renting, |
| mortgage fees, because the agreement is | | | | a lease option is a relative low risk investment for |
| between you and the seller, the money down is | | | | little additional out of pocket expense. The key, |
| negotiable, and sometimes not required at all, | | | | however, is in the terms of the agreement |
| though the amount down typically ranges | | | | between you and the landlord. The terms are |
| between $5000 and $10000 dollars. This is still | | | | negotiable, so make sure you do so. To |
| better than the bank will require. | | | | summarize, a lease option can be a win/win |
| 3. Advantage: Limited risk and leveraged returns. | | | | situation for both buyer and seller. If you are |
| A lease option is an option to purchase, not an | | | | looking for a home but don't have enough for a |
| obligation to purchase. This means that when the | | | | regular down payment or are not sure if the |
| lease term expires, if the home has lost value, | | | | market is going to get worse before better, |
| you can choose to walk away. You give up your | | | | consider a lease option and rest easy. |