Wednesday, June 15, 2011

How Do I Rent-To-Own?

Lots of times potential buyers ask me about a rent-to-own home purchase.  In California, rent-to-own purchases are most commonly done as a "lease-option," where the buyer makes an offer to lease the property over a defined period, with the option to buy it in the future at a pre-agreed price and set of terms.
The first stage is to offer terms of a lease. Often a buyer might offer to lease a $300,000 property for a year at $1500/month, with $200 of that being applied toward the purchase price, should the buyer exercise his option to buy the property at the end of the year. Other lease terms regarding insurance and damages and such would be included in the terms.
Then, along with the lease offer, an option to purchase is offered. The option might be exercised in a time frame of 30 days before the lease expires, although any time frame is negotiable. The offer sets an agreed price of, say $300,000. And the offer includes "option money," a fee that should motivate the seller to agree to the whole process, say $5,000. Additionally, the other terms of a sale such as paying for title and escrow fees, inspection periods, and such are agreed upon in the option agreement.
So, in this example, the Seller get's a $5,000 fee up front in cash that he gets to keep, whether or not the option is exercised by the buyer. The Buyer gets to live in the home for $1500/mo, $200 of which will come off the purchase price when he buys. And when the year is up, he gets to buy at a prearranged price...if he still wants it. If the market tanks, he can walk away, and the seller can put it back on the market.
Of course, all of these terms are negotiable, but this illustrates the basic framework of a lease-option purchase.  Very few lease-options ever come to close, but for some buyers they can provide a creative way to get into a property that otherwise wouldn't be available.