Should you desire to possess your own home but are unable to secure conventional funding today, renting a home with an option to own may be your best option. A rent purchase can make your lease money work for you rather than making your landlord rich. Normally lease to own properties provide rent credits that will decrease the final purchase price!
Here's how it works:
A house is offered via a regular lease with one significant addition. Included is an option to purchase that home at a stipulated price spanning a stipulated time period (usually a couple of years). To be able to get that option, the renter/buyer must pay a one time, NON REFUNDABLE, charge referred to as the option consideration. The exact sum is negotiable, nonetheless it is normally varies between 2.5% to 7% of the price. A fair agreement will credit the purchaser 100% of the option consideration right after closing of the sale. In addition a agreed upon percentage of all lease transactions should be applied toward the price of the home. A few common terms and conditions one might expect to find in a agreement follows:
* To be able to be given a lease credit of 50%, time is of the essence. It's essential to pay your lease on or Prior to the due date of your lease (often the 1st of the month). This means it has to be received by the lessor (landlord) on or before the due date. Any payment received after the due date will lead to a 0% lease credit for that month, a penalty fee may apply and you will not be creating any kind of equity.
* Maintenance is the responsibility of the Tenant Purchaser. You are now renting to own and homeownership involves servicing. This consists of things like shattered windows from rocks or even baseballs, blocked drains, peeling paint, broken appliances, burnt out lights, yard work, etc. Should any big repairs are required to ensure habitability, the owner continues to be responsible.
* You must have Option Consideration. Option Consideration is usually 2.5% to 7% of the price of the home. It is a non-refundable payment, of which 100% is offset against the price, which binds the lease purchase agreement.
Here's an example transaction:
You come across a nice 3 bedroom, 1 bathroom single family home located in a great location with excellent schools and also a solid community members. It has been recently painted, cleaned, and is completely ready to move in. The purchase price is going to be $215,000. Monthly lease payments is going to be $1,500 and you will get a 50% lease credit ($750 a month). You need between 2.5% and 7% in up front Option Consideration. For example your budget allows for $6,000 for Option Consideration. This equates to roughly 2.8% ($6,000/215,000). You will also need $1,500 for the first months lease for a total initial payment of $7,500.
Please note: Option consideration is definitely not a security deposit. It is a non refundable payment that goes towards the price and is 100% credited toward reducing the buying price of the home.
Now let's assume you settled all your monthly lease payments on or prior to the due date and you choose to buy the lease to own home at the expiration of the 12 month rent purchase agreement. You will have $15,000 in equity before you even take posesssion of the home! Here's the calculation:
Lease Purchase Price - $215,000
Less: Option Consideration paid at lease signing - $6,000
Less: 50% rent credit of $750/m x 12 months - $9,000
Net Purchase Price after credits - $200,000
You started out with $6,000 and by paying your lease promptly; your equity standing increased 150% (an additional $9,000) for a total of $15,000 with 12 months. Not a bad transaction! A lot of people find it extremely difficult to save $9,000 in a year with all the costs of living regularly going up.
What's the catch?
Now you may be thinking, "OK, what's the catch? This appears to be too good to be genuine."
Answer, there isn't any catch.
There's lots of probable factors a landlord/seller may choose to get into a lease to own contract. Some reasons may be:
- Needs to preserve possession for at least one year for tax requirements.
- Not able to receive a reasonable price because of local conditions.
- Sick and tired of carrying out minor upkeep.
In addition, when someone sells a property by using a realty service, a commission of 5%-7% is typically paid. In the illustration above, this can be more expensive than the lease credit. Because realtors are generally not included in this sort of transaction, there isn't any commission and the landlord is able to pass off the benefits to tenant/buyer in the form of lease credits.
Also, when the Tenant becomes the Tenant Buyer (by way of lease to own), it comes with an immediate sense of pleasure in possession. Tenant Buyers add value to the local community. They look after their soon to be property, make enhancements, and feel good realizing their lease money is working for them (reducing the price) rather than just making their Landlord rich.
There are also many perks for the renter:
- Build equity toward owning a home.
- No bank or finance company in the picture.
- A less than stellar credit history is probably not an issue.
Milan Doshi holds regular talks on the topic of investing in property. If you want to what to invest in property, then come to his Property Intensive seminar organized by Wealth Mastery Academy that has helped opened the minds of many to the opportunities available in property investment.
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