A lease option, also known as a rent-to-own agreement, is a contractual arrangement between a landlord and a tenant that allows the tenant to lease a property for a specified period with the option to purchase the property at a later date.
In a lease option agreement, the tenant typically pays an upfront fee or premium for the option to purchase the property at a predetermined price within a specified timeframe. This option fee is usually non-refundable and is separate from the rent payments, it is also not a down-payment on the house.
During the lease period, the tenant can opt to pay extra rent to the landlord as they would in a traditional lease agreement. A portion of the rent payments may be credited towards the purchase price if the tenant decides to exercise their option to buy the property.
The terms of a lease option agreement can vary, including the length of the lease period, the purchase price of the property, and the amount of rent credited towards the purchase. It is important for both parties to carefully review and understand the terms of the agreement before entering into a lease option arrangement.
Lease options are great options for someone looking to buy a property but does not currently have enough down payment money, or someone with a low credit score. Most banks require at least a 620 credit score, ideally a 740. It is a great opportunity to live in the home you plan to buy, and fix it up as if it were your own, and build your credit up in the meantime. Here is an example of the financials on a lease option:
- Lease option signing day
- Current home cost: $322,000
- Option money: $5,000
- Monthly rent: $2100
- $100 each month going to a savings, that later comes off the purchase price
At the end of year one, the home price would come down $5,000 because of the up-front option money, and also down $1200 because of the extra $100 per month in savings toward the purchase price. Standard lease options home prices typically have a 3% rate of inflation.
- End of Year 1
- Home cost: $325,460 (3% inflation, minus the option money and monthly extra- $6200)
- Monthly rent: $2100
- _____________________________________________________________________________________________
- End of Year 2
- Home cost: $334,210 (3% inflation, minus the option money and monthly extra- $7400)
- Monthly rent: $2100
- ______________________________________________________________________________________________
- End of Year 3
- Home cost: $343,258 (3% inflation, minus the option money and monthly extra- $8600)
- Monthly rent: $2100
A standard lease option can have a 5 year extension. As long as rents are paid on-time, and the house is staying clean and up-to-standard, then the option can be extended each year. It typically takes three years to eliminate a bankruptcy from your credit score, so a three year option is also pretty standard.
Creating opportunities for financial freedom 