Lease Purchase Option…is it worth considering?

I’ve been working with some individuals that have to sell property before they are in a position to buy another property. Despite this, they’re in need of housing due to personal circumstances. While renting a home is the typical way to go, a Lease Purchase Option is another avenue worth considering.

Due to the large amount of unsold inventory in this market, many sellers are willing to get creative and entertain a lease with an Option to Purchase.

From the seller’s perspective, they are going to look for some kind of benefit for entering into a Lease Purchase Option arrangement vs. a traditional rental. The seller benefits from selling their house at a certain price, but there is no guarantee that the buyer will exercise that option - so a payment over and above the typical rent payment needs to be offered for the opportunity to hold that option. Additionally, the amount needs to be substantial enough to be worth taking the property off the market, with the possibility of the seller having to put the home back on the market if the option is not exercised.

From the renter/buyer perspective, if you want to purchase the property, but circumstances prevent you from making a purchase at the present time, you benefit from locking in a price in a down market. Let’s say you’re paying the seller an extra $1,500 per month for a 12 month lease with an option to purchase, the worst case scenario is that you may have to pay $18,000 over and above what you would have paid if you rented the property. But, if you are getting a discount on the purchase price it might be worth it.

I would also suggest structuring the deal so that if the option is exercised, some or all of the rent payments are credited to the buyer against the agreed on sales price. Effectively, you are paying yourself prior to exercising your option to purchase. While the seller may not credit all the payments towards the purchase price, crediting some of the payments towards the purchase price provides a greater incentive to the buyer to go forward with the purchase.

Exercising an option to purchase depends on where the market goes after you make the deal. If the market remains constant and the option to purchase is exercised, it works best for both buyer and seller. If the market goes back up, the buyer has locked in a lower price. If the market goes down, the buyer typically would not exercise the option and would try to work with the seller after the option to purchase expires (yet, they risk losing the property to another potential buyer).

While these are not the only issues to consider when entering into this type of deal, depending on your circumstances, this might be the best way to get into the home of your dreams.

- Tom Kilby, Associate Broker