You just received notice from your landlord that your rent will increase by 5% during the next lease period. You have been saying for a long time, "next year I will save enough money to buy my own home and pay off my own mortgage instead of someone else's." Unfortunately, as the year draws to a close the inevitable has happened. Your savings is sitting in the driveway or it's amazing how expensive children are to raise or there must be something in the house wiring burning out both refrigerator and washing machine motors at the same time. Whatever the reasons, unexpected and unplanned events have taken you further and further away from your goal. You have not saved the money needed for a downpayment. You also know there will be loan closing costs factored into the financial calculation. You feel it's a hopeless situation and you may as well spend a dollar each Wednesday and Saturday to buy a lottery ticket (the odds may be better). Above all, how do you start formulating a plan for the biggest financial commitment of your life?
First things first. It may not be as hopeless as you may think. There are many ways to buy a home utilizing some creative negotiating techniques and financial strategies. Over the next number of weeks (if I get to keep this gig), we'll explore some of them. If you find yourself strapped for the cash needed to get you into your first home and you have no family members to approach for the necessary funds or you cannot find a seller who is willing to carry back a 20 to 25% second trust deed or mortgage, you should look at the possibility of a "lease option" or, in other words, a "lease with an option to purchase."
You are presumably familiar with the term "lease." You either have or have had a lease on your apartment or house. You may even be leasing your car. You may have leased some business equipment. Some leases are structured so that at the end of the lease all you must do, is return the item you leased in good condition and walk away. Others are formulated so that your payments are sufficient to cover the cost of the item and any finance charges. Once all agreed upon payments are made you own the leased item at the end of the lease period (much like an installment sale). There also exists a type of lease that requires "structured monthly payments" during the lease period. Incorporated within this lease is an "option to purchase agreement" allowing for the purchase of the leased item with one final payment at the end of the lease term.
For many transactions, the last description is the traditional way that a real estate "lease option" or "lease with an option to purchase" is structured. With an option the seller and you, the lessee, contractually agree that you have the right, but not the obligation to purchase the property at an agreed-upon price within a specific period. For this right, you (the lessee) may be required to give the seller (the lessor) a certain amount of up-front money. The up-front money given to the seller to secure your option may be nonrefundable. If you later determine that the property is not for you, you may have no reasonable or legal remedy to have the money returned to you. If you desire to purchase the property within the specified option period, the money deposited will be, in most situations, credited to you as part of the downpayment.
You probably have guessed that the "structured monthly payments" on a lease option is your monthly rent. The landlord or lessor offering the lease option may at times require a monthly rental payment higher than market rents for the area. If you make the decision to fulfill the option and purchase the property the part of the monthly rent above the market rent will be credited to you as part of your downpayment. There is no requirement on your part to pay more than the market rent. You have the right to negotiate any part of the contract with the lessor (landlord). You may find leasing with the option to purchase a very viable way to systematically save for a home so that in one or two years you will say "I'm ready to buy, NOW!"
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