A Lease Option is a great way to buy a house if you're not currently in a position to qualify for a mortgage. It gives you some of the advantages of home ownership, allows you to build equity, helps to restore your credit, and it provides you with an escape from the mindless, expensive rental 'merry-go-round'.

With 30 years of experience as a licensed agent, I'm absolutely amazed at the level of misinformation that's being consumed regarding most creative financing techniques. Most of the inaccurate information comes from unlicensed people who think they understand what they're doing. Sadly, some ARE licensed agents who lack the experience and skills needed to implement and complete these transactions in a responsible way.

Lease Options, also known as Rent-To-Own programs are for people who have a few manageable issues that are preventing them from obtaining a mortgage within the near future. Those issues usually consist of:

1. starting a new job and meeting the minimum employment requirements

2. a few outstanding credit issues that need to be resolved

3. self-employed people who have undocumented income

4. separated people in the midst of a divorce

5. people who have already rebuilt their credit after a divorce, foreclosure, bankruptcy, medical issue, or a  short sale and need to meet the seasoning requirement to obtain bank financing.

6.  those who are waiting for a lump sum payment from the sale of a previous home, an insurance settlement, or who are waiting for an inheritance to be disbursed.

Lease Options require more than just having good intentions. They also require having the ability and the desire to effectively and promptly handle whatever issues are present. They are not recommended for people who have chronic financial problems. 

Here's a brief overview of how Lease Options are transacted:

1. The potential buyer/tenant has an in-depth conversation with a competent and knowledgeable Mortgage Loan Officer to determine what issues need to be addressed, how they can be handled, implement a plan for correction, and to decide for themselves whether it's feasible to move forward.

2. Now that they've spoken to a Loan Officer and have determined that the situation is workable, a search for prospective properties will begin. The only challenge here is locating sellers who are willing and able to participate in a Lease Option transaction. 

3. They've found a suitable house and they're ready to move forward. The required paperwork is prepared and consists of contracts, leases, disclosures, and addendums. That paperwork is submitted to the seller along with the Option Fee and first month's lease payment for the seller's approval and acceptance. Once accepted, the Home Inspection (optional) is ordered and performed. Once that contingency has been settled, arrangements are made for you to take possession of your new home.

Here are a few things to keep in mind that make Lease Options different from just renting:

1. In Lease Options transactions, the normal landlord/tenant relationship becomes more of a buyer/seller relationship. Basically, the seller is providing short term financing to you. That means you become responsible for all upkeep, maintenance, and repairs. It's going to be your house, it's now your responsibility to take care of it.

2. The Option Fee that is collected upfront is usually in lieu of a conventional security deposit. It's also non-refundable but it does become a credit towards the purchase price when you get the home refinanced into your name. In other words, if you don't complete the purchase for whatever reason, you lose the Option Fee. If you complete the transaction, it becomes part of your down payment or a credit towards your closing costs.

3. In most cases, you're free to make cosmetic modifications to the property at your expense.

4. In most cases, you get to keep your pets at no additional expense.

One of the biggest pitfalls involved in Lease Options is the monthly rental credit. In theory, a portion of each month's lease payment is used as a credit toward the purchase price. For example, let's assume a 4 bedroom house has a market value rent of $1,500/mo. The market rent is based on what other similar properties are generating as gross rental income. Any rental credit would have to be added to the fair market rent. In other words, if you want a $200/mo. credit, the $1,500/mo. used in this example would have to be increased to $1,700/mo. What happens if you're dealing with someone who doesn't understand this financing requirement? You can lose money. Lots of it. If the market rent is $1,500/mo. and an agent or a landlord agrees to give you a credit of $200/mo., the effective rental rate now becomes a below market rent of $1,300/mo. and the credit will be disallowed by the bank when you refinance the property into your name. Always remember that rental credits aren't required in Lease Option transactions. My suggestion? Avoid them altogether so it won't be an issue later.

If you'd like to discuss Lease Options or any other creative financing technique, call me at (804) 305-9553.