(also called "RENT TO OWN" or "LEASE PURCHASE")
LEASE With OPTION is a financial arrangement that combines Residential Lease with an Option to Purchase Agreement.
You're leasing a house with an option to buy it at any time during the lease term for the price usually set upfront. Each month part of your rent goes towards the purchase known as RENT CREDIT (You're not throwing your hard earned money away anymore, you're building equity!).
The required down payment is usually 3 to 5%. This is known as Option Consideration.
Both the RENT CREDIT and the DOWN PAYMENT go towards the purchase price and secures your exclusive right to purchase the property during the period of your lease.
LEASE WITH OPTION Advantages
Lease with Option offers you 3 important benefits:
1. Small Amount of Up-Front Cash Required
The amount of Option Consideration (down payment) is around 3 - 5% vs. 10-30% down payment required in conventional purchase. There is no closing costs, which would normally run you around $2K to $4K. Instead, you can have that money working for you.
2. Profit From Appreciation & Equity Buildup (see example below)
By doing a Lease with Option you lock up the price of a home up front. During the term of the agreement the price of the home will not change, even if home values in the area increase.
If you just continue leasing where you are right now, you will likely discover that a year or two from today you will have to pay 10%-15% higher price for the same house you wanted to buy now. Why do that, when you have a Lease with Option alternative?
And not only do you profit from appreciation, you build equity through the rent credits that are given to you each and every month.
3. Time To Obtain the Best Financing
You buy yourself some time allowing you to work on whatever is stopping you from getting a loan today, your weak link. You must correct your credit, build up the down payment, or work up a consistent income from self-employment.
There is no pressure, no rush and you can search for the best financing available. Most lenders will consider Lease with Option as a partial ownership allowing you to "refinance" instead of treating it as a "new purchase" loan. That will save you some fees.
Let's look at a typical example of acquiring a home using the Lease with Option concept:
Sales Price: $ 100,000
Option Consideration: $ 5,000 (down payment)
Monthly Rent Payment: $ 1,000
Monthly Rent Credit: $ 250 (in this example 25% of your rent is credited)
After 12 months you will accumulate $ 3,000 (12 x 250) in rent credits. So your EQUITY will be $ 8,000 (rent credits + down payment) after only 12 months. You will only need to get a loan for $ 92,000 (sales price - equity), which wouldn't be a problem assuming you have paid the rent payments on time and other obligations were paid in timely fashion.
Let's compare this to a house that you buy through a bank. Let's for a moment assume that you have A++ credit and that a bank is willing to give you a loan with only 5% down. So to get in a house like the one in our example above, you would need $5,000 (5%) for a down payment, and you would need $2,500 (2.5%) for closing costs. With a loan at 7%, only about $78 would go towards principal, the rest would be interest, taxes and insurance. So in one year you would have 12 x $78 = $936 towards principal, and your equity would be $5,936 (5,000 + 936). So as you can see you can build more equity with Lease with Option plan ($8,000 vs. 5,936) during the first year and you don't need to spend money on closing costs.
