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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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