When a renter signs a
lease with an option to
purchase the property
for a specific price
within a certain time
frame, that is called a
lease option. In most
lease-option situations,
a portion of the rent is
applied to a future down
payment.
Lease options are
most popular among
buyers who don't have
enough funds for a down
payment and closing
costs.
Q:
How do lease options
work and what are the
benefits?
A:
Most lease-option
agreements specify that
a portion of the rent on
the property in question
is applied toward the
purchase if the option
is exercised. This is
referred to as rent
credit. Institutional
lenders accept rent
credits as part of the
down payment if rental
payments exceed the
market rent and if a
valid lease-purchase
agreement is in effect,
a copy of which must be
attached to the loan
application.
For sellers, lease
options give them
several advantages,
especially in a slow
market. These include a
monthly rent higher than
market rent, top-market
value for the property
and tax-free use of the
option consideration
until the option expires
or is exercised. Also,
the renter is more
likely to treat the
property like an owner,
tax-free use of option
consideration until the
option expires or is
exercised.
Lease-options should
be read carefully for
details on transferring
the option and other
important concerns.
