Lease Options: A Perfect Answer for Home Sellers in Today's Market
In the last few months home loans that were once quite easy to obtain
have become far more difficult due to the fallout of the subprime
market. In many areas, this fallout combined with reduced selling
activity has made it increasingly difficult to sell homes; particularly
second homes. Home sellers who are facing two mortgages either as the
result of owning a vacation property or from buying another home before
they sell their last home are now looking for solutions to the problem
of holding two mortgages at the same time.
When it comes to vacation homes and family get-aways, rather than
winterize the family retreat to make it through another winter many
families are turning toward lease options to solve the problem of
having two mortgages at one time. Lease with an option to buy can also
provide an opportunity to buyers who want to sample a home to do so
while also taking advantage of the opportunity to credit a portion of
the monthly rent toward their down payment.
Real estate lease options can also assist home sellers who have made a commitment to
purchase another home with the contract contingent on the sale of the
home in which they currently reside. When the time comes when they must
either purchase the second home or else lose it, the buyer must either
make the decision to make two mortgage payments until the first home
sells or give up the contract on the second home. A lease option
provides a third alternative for many people in this situation. Home
sellers can make a 12 to 18 month lease agreement available with the
option to buy within the period of the lease.
With this type of agreement the home seller and the home buyer agree on
the purchase price. That figure typically falls somewhere between the
existing market value and the market value the home is expected to have
within a year. This is because the prospective buyer can exercise the
option to buy anytime within the next 12 to 18 months.
Both parties compromise while also taking advantage of key benefits with
this type of agreement. For example, the home buyer pays slightly more
than current market value in order to pay a smaller cash down payment.
This can be a particularly advantageous benefit for buyers who are cash
poor. Home sellers give up the presumed higher market value of a
possible future sale for cash in hand at the current time.
The home buyer is charged a non-refundable fee for the lease option. A
number of factors can impact the amount of the fee including the size of
the home and how eager the home seller is to move. It should be
understood that the fee is paid in addition to monthly lease payments.
The fee may be considered part of the down payment in the event the
buyer decides to exercise the right to purchase during the lease period.
Generally, many home sellers have found a correlation between higher
fees and the quality with which the buyers maintain the property during
the lease period.
The two parties will also need to agree to the amount of the rent that
will be applied toward the down payment. This amount can vary based on
the agreement of the parties. It is important for both parties to
specify the terms of the sale and lease in the agreement. This includes
interest rates.
While this type of agreement works well for many home sellers in many
situations it is important to take several factors into consideration.
For example, sellers should always make sure they carefully review their
mortgage paperwork before they enter a lease option to ensure there is
no due on sale clause. The seller should also take into consideration
the fact that while this type of lease option will provide them with
some monthly revenue it may not allow them to immediately recover the
equity they have in their home; which could be crucial to completing a
contingency contract on the purchase of another home.
Sellers should also remember that real estate agents may be somewhat
hesitant about this type of agreement because it means they must risk
their commissions on whether or not the buy option will be exercised.
They may also be concerned about the fact that a lease option also means
the agent must defer their commission until a deal is confirmed on the
property.
Other real estate agents are more open to the concept; understanding
that a lease with a buy option can help to keep an endangered deal
together with a greater chance of future business.
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