Benefits to Tenant Buyers an Eager Market

In recent years, the benefits of lease options to tenant-buyers have been extolled by the respected, nationally syndicated real estate columnist Robert Bruss as well as by most books written for first-time homebuyers. For example, in my book, Yes! You Can Own the Home You Want (New York: John Wiley & Sons, 1995, p. 59), I tell hopeful homebuyers,

There's simply no question that lease options can bring home ownership closer to reality for many renters in at least six ways:

1. Easier qualifying. Qualifying for a lease option may be no more difficult than qualifying for a lease (sometimes easier). Generally, your credit and employment record need meet only minimum standards. Most property owners will not place your financial life under a magnifying glass as would a mortgage lender.

2. Low initial investment. Your initial investment to get into a lease option agreement can be as little as one month's rent and a security deposit of a similar amount. At the outside, move-in cash rarely exceeds $5,000 to $10,000, although I did see a home lease optioned at a price of $1.5 million which asked for $50,000 up front.

3. Forced savings. The lease option contract typically forces you to save for the down payment required when you exercise your option to buy. Often, lease options charge above-market rental rates and then credit perhaps 50 percent of your rent toward the down payment. The exact amount is negotiable. And once you have committed yourself to buying, you should find it easier to cut other spending and place more money toward your "house account."

4. Firm selling price. Your option should set a firm selling price for the home, or it should include a formula (perhaps a slight inflation-adjustment factor) that can be used to calculate a firm price. Shop carefully, negotiate wisely, and when you exercise your option in one to three years (or whenever), your home's market value could exceed its option price. If your home has appreciated (or you've created value through improvements—see below), you may be able to borrow nearly all the money you need to close the sale.

5. 100 percent financing possible. You also can reduce the amount of cash investment you will need to close your purchase in another way: Lease-option a property that you can profitably improve through repairs, renovation, or cosmetics. After increasing the home's value, you may be able to borrow nearly all the money you need to exercise your option to buy the property.

For example, assume that your lease option purchase price is $75,000. Say by the end of one year, your rent credits equal $2,500. You now owe the sellers $72,500.

Through repairs, fix-up work, and redecorating, you have increased the property's value by $10,000. Your home should now be worth around $85,000. If you have paid your bills on time during the previous year, you should be able to locate a lender who will finance your purchase with the full $72,500 you need to pay off the sellers. Or, as another possibility, you could sell the property, pay the sellers $72,500 and use your remaining $12,500 in cash proceeds from the sale to buy another property.

6. Reestablish credit. A lease option also can help you buy when you need time to build or reestablish a solid credit record. Judy and Paul Davis wanted to buy a home before prices or interest rates in their area rose above their reach. But the Davises needed time to clear up credit problems created by too much borrowing and Judy's layoff. The lease option proved to be the possibility that helped the Davises achieve their goal of home ownership.

Experience shows that when prospective tenants and homebuyers think through this list of benefits, they become a ready market for lease options.

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