NOTE: Learn how to Buy A Home With Down Payment Assistance with classes offered by San Diego Community College – Cesar Chavez campus (1901 Main Street, San Diego CA 92113).
Many families dream of owning a home someday. Their current financial situation only allows them to rent. Thus, there’s an interest in Rent-To-Own homes. Technically these are Lease-with-Option [to buy] or sometimes they are called a rent-option-to-buy.
What is a Lease-with-Option [to buy]?
A Lease-with-Option is a type of contract that requires a renter to pay a fee in order for them to be able to purchase a property at a specified price on a later date. Typically around two or three years later. This fee often goes toward the down payment for the home.
These contracts can have huge financial benefits for many families. They open up many possibilities such as finding a home in a school district you prefer with the option to buy at a relatively affordable price later, for example.
It’s not that easy however, as buyers need to consider a few things before entering into a Lease-with-Option contract agreement.
Some things to consider
Will you be able to qualify for a mortgage in the future?
If you are unable to buy a house right now, you have to think about what can change over the next couple of years. Many find it difficult to improve their credit rating within the period of the contract. If you can’t qualify for a mortgage during the option period then you miss out on the ownership possibility.
Another thing to consider is what will happen with the option fee under each outcome. Will there be another fee if you do not exercise your option to buy the home? Also, will you have to move out if you don’t buy the home?
Additionally, some people encounter problems as there are lenders who do not accept the accumulated down payment due to conflicts regarding fair market rent.
Is it worth the cost?
Renters who don’t buy the home after the end of the option period will lose the option fee. Lease-with-Option contracts typically do not offer refunds of the fee.
Additionally, Lease-with-Option contracts are typically offered by sellers looking to make a future profit. So it’s possible for the home’s value not to increase enough during the option term. If it does not, you will have trouble getting the home to appraise for the value of the sale. At this point, the lender may ask for a larger down payment.
Consult your agent to determine whether a home’s price is realistic, and to have a better grasp of price trends in an area.
Is there anything to look out for in the contract’s fine print?
There are often plenty of pitfalls and complications associated with lease-with-option-to-buy contracts, so it’s a good idea to hire an experienced Realtor along with a knowledgeable and trustworthy real estate attorney to review the terms.
Other concerns include liens that could prevent the sale, who is on title vs. who has signed the contract and how the rent payments are being used.
If you need assistance with a Lease-with-Option contract, contact me at 760 622 5087 or [email protected]