Try it before you buy it

The "try it before you buy it" technique is called the lease option. It combines a lease agreement for a home, a townhouse, or apartment with an option (a contractual right) to buy that property at a later date. In the early 1980s, Robert Brass called lease options "the most overlooked and underused" property finance possibility. At that time, most homebuyers, home sellers, and real estate agents remained clueless about this technique.

Times have changed. Wherever I travel throughout the United States, I always check through the local real estate classifieds. In most cities, real estate agents regularly handle lease options and other low-down-payment property finance plans. I have also seen lease options promoted by home builders and developers of new condominiums and townhouses. In San Francisco, one ad from Bay Crest Condominiums boldly announced, "If You Can Afford to Rent, You Can Now Afford to Own: Exciting New Lease/Purchase Option." No question, lease options can bring ownership closer to reality in several ways, such as:

  • Easier qualifying. Qualifying for a lease option may be no more difficult than qualifying for a lease—sometimes easier. Generally, your credit and employment record need meet only minimum standards. Most property owners (sellers or lessors) will not place your financial life under a magnifying glass as would a mortgage lender.
  • Low initial investment. Your initial investment to get into a lease-option agreement can be as little as one month's rent and a security deposit of a similar amount. At the outside, move-in cash rarely exceeds $5,000 to $10,000, although I did see a home lease-optioned at a price of $1.5 million that asked for $50,000 up front.
  • Forced savings. The lease-option contract typically forces you to save for the down payment required when you exercise your option to buy. Lease options often charge above-market rental rates and then credit perhaps 50 percent of the rent toward a down payment. You negotiate the exact amount. After you commit to buying, you should find it easier to cut other spending and place more money toward your "house account."
  • 100 percent financing possible. Here's how to reduce the amount of cash you will need to close a purchase. Lease-option a property that you can profitably improve through repairs, renovation, or cosmetics. At the increased value, you may be able to borrow nearly all the money you need to exercise your option to buy. For example, assume your lease-option purchase price is $375,000. Say by the end of one year, your rent credits equal $20,000. You now owe the sellers $355,000. Through repairs, fix-up work, and redecorating, you increase the property's value by $60,000. The property now boasts a value of $435,000. If you have paid your bills on time during the previous year, you can finance your purchase with the full $355,000 you need to pay off the sellers. As another possibility, you could sell the property, pay the sellers $355,000, and use your cash from the sale as a down payment on another property.
  • Reestablish credit. A lease option can help people who need time to build a higher credit score. The option locks in your price. Pay all bills on time. Avoid all destructive debt. Your score can jump 100 points. (Remember, credit scoring programs weight recent credit history more heavily than the experience of years past.)
What You Need to Know About Real Estate

What You Need to Know About Real Estate

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