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Lease with Option to Buy Homes - Pros and Cons

Lease-with-option setups are starting to catch on and are actually fairly popular with mobile homes in particular.  A lease with option to buy can be a definite win-win for all parties involved.  For the buyer/renter, there’s time to get settled in, see how you like the property, and increased buying power.  For the seller/landlord, there’s minimum risk and no commissions or fees.  Let’s look at a few advantages for the renter/buyer:

Advantages for the renter/buyer:

  • Rent moneys apply towards purchase price
  • Credit problems not a problem.  With the lease-with-option setup, the financing is strictly at the owner’s discretion and your credit history won’t be an issue.
  • No taxes, less liability.  As long as you are paying rent (which will go towards purchase price anyway), the taxes on the property are the landlord’s, not yours.
  • No move-in time.  Not a problem…you’re already there!
  • Maximum leverage.  You’re getting in the door on a valuable piece of real estate without putting down money for a down payment, closing costs or any of the other expenses that go along with a conventional home purchase (other than lease-with-option-to-buy)
  • Minimal maintenance.  Until the day you actually decide to buy, maintenance issues on the property are up to the landlord, not you.

Disadvantages for the renter/buyer:

  • Higher-than-usual rents.  If the renter gets cold feet or for some reason can’t follow through on the lease-to-buy option, he will have spent considerably more money on rent than he may have in other situations.
  • Non-refundable deposit.  Again, if the renter reneges for some reason on the lease-with-option, his deposit that he put towards purchase will most likely not be seen again.
  • Price.  In a declining market, a home price that was agreed upon two years ago may not be a fair price anymore.  That will mean that the deposit and rent premium will not be money well spent, and the renter can wind up purchasing a house that’s above market value if he follows through.

It’s important to remember that many of the people who would be interested in a lease-with-option are people who can’t qualify for a home loan.  If their financial standing doesn’t improve or if the landlord/owner doesn’t want to do an owner-finance (or if he needs to sell, and not necessarily to the renter), there are a number of ways that a lease-with-option can go wrong.

 

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