Lease And An Option To Buy With A Twist

In most areas the market for the resale of homes is either slow or extremely slow. This is especially true of more expensive homes. In fact, many home owners are faced with the reality that if they don’t sell soon or receive some good financial windfall, they may be forced to give up their home. The flip side of this story is that there are many potential buyers of homes who may have some cash and an adequate income to pay monthly for a nice home; however, they don’t have a large amount of cash or for whatever reason they can’t qualify for a new loan to purchase a home.

One Solution a home owner might consider is to lease their home to a potential buyer as described above with a separate option to buy agreement. First lets discuss the lease. The existing mortgage loan on the property should be reviewed to determine if there is a clause pertaining to the owners of the home leasing to a third party. Some mortgages state a maximum length of time a lease may be written for. If such a statement is in the mortgage, (and most of the have it) then the lease should be of a lesser time than the maximum stated. Most mortgages I have seen state three years.

For this same reason, I recommend that the option to buy be a separate, so as not to disturb the lenders. I recommend that the option be long enough to give the property time to appreciate in value. For example, 3 to 5 years with possible extensions. In exchange for the ample time for the option to be exercised, the owners (sellers) could share in the accrued appreciation.

A Hypothetical Transaction:

1. Owners asking Full price for home = $250,000
Existing loan on home = $150,000
Somewhat inflated equity = $100,000

2. Existing monthly loan payments, PITI (principal, interest, taxes, insurance) – $1,250

3. Lessee/Potential Buyers and owners execute a 3 year lease for $1,500 per month.

4. Potential buyers & owners execute a 5 year Option Agreement giving potential buyers the option to buy the property at any time during the 5 years for $250,000. The owners agree to give potential buyer a credit of $200.00 for each month’s rent paid during the term of the lease.

~ The option could also contain an agreement that the potential buyers could extend the

lease agreement to coincide with the term of the option.
~ In exchange for the rent credits the owners might receive 25% of the appreciation

over $250,000 when the house is sold.

These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.