Lease To Buy Options For Real Estate Rule To Know

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There are some lease to buy options for real estate to know, both for consumers and people in the real estate community. With the way the economy is today, it’s more difficult to come up with a down payment to buy a property. The creative California home loan has pretty much disappeared but home buyers still are looking for creative ways to buy real estate.  Leasing or renting property built in with an option to buy the property at a later date, has been around for decades and it’s being used again as a method to help California first time homebuyers get into a home.

There are several ways to structure the lease option to buy contract.  The method I’m going to illustrate here is for the renter to build up funds on a monthly basis which will be used at a future time for a down payment to purchase the property they are renting or to be renting.

Many of the lease option to buy contracts I see do not work for several reasons.  First, the rent being paid must be market rent for the area.  Too many times I see rental agreements between relatives where the rent is below market rate.  Realtors and landlords may not be familiar with lending guidelines for the lease to own transactions.  Just because you sign a lease to own contract doesn’t mean a lender will honor it, certain rules have to be followed.

Second, to build a down payment fund on a monthly basis, the renter needs to pay market rent, let’s say $1400 plus additional dollar amount, say $300, making the monthly rent $1700.  The $1400 gets credited by your landlord or management company as rent, and the $300 balance goes into a separate account which starts building towards a down payment. So you’re paying higher than market rent in total, but you are building a down payment with the excess $300 funds.

Third, the renter needs to keep track of their payment receipts.  Paying by check is the best, because if you lose the check, you can always get a copy later from your institution.  You also want to make sure that you keep your method of payment consistent.  Paying your rent via a check one month, and than by cash another month and than by cashiers check another month may cause home loan lender suspicion and place additional hurdles in your path to attain homeownership.

Realtors, leasing agents, landlords and the general public don’t realize that there are lending rules on the lease option to buy method.  It’s best before you sign such a contract to call a few different lenders to ask how it needs to be structured.  Also check to see how much of a down payment you are going to need, say 3.5% for an FHA loan, and than come up with how you are going to save up for that dollar amount using the lease option to buy.  For example, if the landlord states the market price for the home you want to buy is $275,000, 3.5% would be $9,625.  If market rent is $1,500 and you can afford an additional $400 on top of that, than it would take you 24 months to save up for the the $9,625 down payment ($9,625/400 = 24).  You would than negotiate with the landlord to see if the 2 year period works them and go from there.

The property market value may go up or down during the two years, the homeowner more than likely will not lock in the current market value for you, so that would have to be taken into consideration.  Also, you would need to make sure that if at any time you as a renter decides to move, that your lease option to buy down payment fund is refundable to you, don’t assume that it is!  Make sure your down payment fund is going into an institution that is a non interest bearing account, and one that can produce monthly statements, like a savings account.  Your landlord must control these funds and the account needs to be dedicated to you and the property in which you are interested in using the lease option to buy method.  If the landlord intermingles your down payment funds with other funds it will cause problems with the home loan lender and your loan would be put in jeopardy.

All in all when a lease option to buy contract is done correctly it’s a win-win.  Just make sure and contact a few home loan lenders on how they do it, get your down payment fund target amount identified, and have a lease option contract drawn up that is agreeable to all parties, stay consistent with your method of payment and keep accurate records.

If you have any questions or concerns in regards to lease to buy options for real estate to know, please don’t hesitate to give me a call or leave a comment below!


Kevin Walton



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