Why Not "Lease with Option to Buy" ?

Many people in the current market place ask about leasing, with option to buy. There have been instances where this option has worked out very well for people in the past. However, in the current market place, there are some serious complications that can arise with lease/options, and I would like to bring an awareness to Buyers and Seller alike, of some of the pitfalls associated with lease/options.
First, let us look at a typical "Lease, with Option to Buy" sale.
A Tenant/Buyer finds a home and puts a contract on the home.
In the contract, they state:
- the price they are willing to pay;
- the period of time that they will be leasing the home;
- the date at which they plan to purchase the home;
(Typically, the lease period is one to two years, with the home being purchased at the end of that time period.)
- the amount of the lease/option deposit;
(Typically, $3,000 - $5,000. This deposit is to assure the Landlord/Seller that the Tenant/Buyer is seriously wanting to buy the home. If the home is not purchased, this Lease/Option Deposit is non-refundable.)
- the amount of the monthly payment; and
- the amount of the monthly credit that will go toward purchasing the home. Many Landlord/Sellers will not give a credit, but those who are motivated to sell the home, will offer credits. Many are in the $100. range.
Usually, with Lease/Option contracts, Tenant/Buyers are responsible for repairs to the home during the Lease/Option period.
Now, we will consider some of the negative possibilities for those entering into such contracts.
1) Value of the Home Decreases - If the home goes down in value, when the time comes for the Tenant/Buyers to purchase the home, they may not be able to get financing on the home.
(i.e. - If they signed a contract to purchase the home for $150,000., and at the end of the Lease/Option period the home is worth $130,000. a lender will not loan $150,000. to an individual in order for them to purchase a home that is only worth $130,000.)
Effects on the Tenant/Buyer - If unable to purchase the home, the Tenant/Buyers will loose their option money, all credits earned, all monies put into repair and upkeep of the home, and will very possibly have to move and start all over.
Effects on the Landlord/Seller - The Landlord/Seller will have to sell, or put the home back on the market at the current "lower price", rent the home, or consider other options. Lost revenue may occur due to the reduced price, and also vacancies while beginning the marketing process all over again.
2) Interest Rates Increase - If the Tenant/Buyer calculates that they can afford the home based on today’s interest rates, which are at historical lows, and those interest rates go up during their lease period, they may not qualify for the loan based on the higher interest rate, due to an increase in their monthly payments.
(i.e. $150,000 purchase price, with an interest rate of 5% for 30 years, results in a monthly payment of $805.00 for principle and interest only. If the interest rate goes up to 7% by the end of their lease term, their monthly payment of principle and interest would jump to approximately $1000.00) Obviously, interest rates could go much higher.
Effects on the Tenant/Buyer - If unable to qualify for the higher payments, the Tenant/Buyers will loose their option money, all credits earned, all monies put into repair and upkeep of the home, and very possibly will have to move and start all over.
Effects on the Landlord/Seller - The Landlord/Seller will have to sell, or put the home back on the market at the current price, rent the home, or consider other options. Lost revenue may occur due to vacancies while beginning the marketing process all over again. The Landlord/Seller could experience a loss or profit, when considering the value of the home, depending on the market. If home values have increased, the Landlord/Seller could benefit. As discussed earlier, if home values decrease, the owner of the home will most likely need to lower the price of the home, in order to compete with the current market.
3) Mortgage payments are not being paid - It is not uncommon for Tenant/Buyers to be paying their monthly house payments regularly, and discover that their Landlord/Seller has not been paying the mortgage payment. In such cases, the home is foreclosed on.
Effects on the Tenant/Buyer - The Tenant/Buyers will loose their option money, all credits earned, all monies put into repair and upkeep of the home, and will have to move and start all over.
In conclusion, those pursuing to "Lease, with Option to Buy" in this market, are putting themselves at a high level of risk.
The good news is that;
- historically low interest rates,
- a market place abounding with homes that are priced low, to sell quickly,
- USDA loans which allow people to buy with very little down, and
- an $8000 tax credit that is available to those who have not owned a home in the past three years,
are all available to those who are wanting to find a place to call "home".
The sad thing is so many people assume that they cannot buy and therefore, never even try, when a few quick phone calls, to a few lenders, could start them on the path that would lead them to home ownership in just a month or two. I say a few a lenders, because, if one lender says "no", it is always good to try someone else!
Take the first step, call a lender and tell them that you want to get "pre-qualified" to buy a home!
What do you have to lose?

(For my list of lenders, call 888-596-2252)