|When Chris and Sarah Kane of Visalia, Calif. decided to purchase their first house, their hopes of becoming first-time homebuyers were nearly dashed by ever-soaring prices and a down payment out of their reach.|
“We found a home we really liked for $221,000 and figured we would just have to rent it,” said Chris Kane. “But as we thought more about it, we knew we didn’t want to spend over $2000 a month on a home with nothing to show for it.”
Instead, they took a different tack with the seller.
“We decided to ask if the owner would consider a lease-option where we could apply our rent to the purchase of the house. An agreement was made, and 12 months later we had over $20,000 equity in the home — and our down-payment was covered,” he said.
Renting to own, otherwise known as a lease-option, provides a way for those not in a position to make an immediate purchase to settle on something that is right for them — and at the right time.
For example, people who have made a recent job transition or who need time to strengthen their credit or come up with a down-payment may benefit substantially from this type of home-purchase plan.
Although often tailored to accommodate both buyer and seller, all lease-options work about the same: the renter agrees to lease the house for a pre-determined amount of time (typically one to three years); an up-front consideration fee with or without an elevated monthly rent may be required (the portion over market goes into a “fund” that is later utilized as a down payment); they provide the opportunity to lock in a price when the deal is made, with the option to purchase at that price, either when or before the lease is up.
Timing is key
As with any other home-financing plan, timing is everything.
“Market conditions are a critical factor in finding a lease-option,” said Oscar Munguia, real estate broker and president of Consolidated Financial Group in Simi Valley, Calif. “Currently, the market is steady, making it difficult to find one – unless an owner really needs to sell. But as homes begin to sit longer, as they are in places like Arizona, sellers will start to lose money, causing the window for lease-options to open.”
While the perks of lease-options are obvious, so is the danger of forfeiting the money invested if the option to purchase is not exercised.
“Lease-options typically favor the buyer, but they can be complicated and dangerous to those unfamiliar with them,” Munguia warned. “For this reason, they should seek counsel from a broker, and also have a real estate attorney inspect the contract to ensure their financial protection and security.”
With the aid of professionals, an eye for opportunity, and a good sense of market timing, lease-options can be a smart solution to throwing away money. First-time home buyers who play their cards right can eliminate obstacles conventional loans may present, and go on to realize their dream of homeownership. For Chris and Sarah Kane, it was the ace they had been waiting for.