Lease Options
Leasing property with an option to buy is an often-overlooked type of financing that can make property ownership a reality for cash-strapped buyers and desperate sellers, according to Mark Canfora of Pre-Paid Real Estate, LLC. According to Canfora, also the president of the Mark Canfora Investments, a lease option to purchase offers a dual advantage, by giving buyers time to accumulate equity, down payment or closing costs funds, while possibly netting the seller a return as favorable as that realized on a more immediate sale.
A lease option purchase is a cross between a typical contract-of-purchase and a lease, and is not much different from writing a contract with a delayed closing, he says. "Although this type of transaction is a little more complicated than some of the others, it helps prospective buyers become owners. Sellers will be happy they're out of the property and pleased to have renter/purchasers who will take better care of the home than would renters with no stake in it," Canfora says.
An ideal candidate to buy on lease option purchase is someone who was turned down by a traditional lender. I have recently heard of clients with a 700 plus credit score being refused a loan commitment. That was unheard of a few years ago. Lease Optioning establishes a proven, documented history in a property called “Equitable Rights” and the proven ability to handle the payments on that same property, Canfora says.
The best candidates to buy on Lease Option would be the recently divorced, widowed, those emerging from bankruptcy, families moving from two incomes to one, newlyweds, recent graduates, and of course real estate investors. All desiring not to just be a just “renters”, but ultimately a “home and property owners” Canfora says. A Win-Win for both sides.
 A lease option agreement generally lists the purchase price, amount of option funds (a non-refundable payment the buyer makes toward the down payment), length of the lease term, amount of the monthly rent payment, and the amount of the rent payment to be credited toward the purchase. Canfora explains that since the option funds are not refundable, the tenants should be pre-qualified for the financing needed to close when the lease-purchase option is drawn up. In addition, they must make sure they will have the funds to close on or before the expiration of the lease option agreement.
"The greater the option funds payment and rent credit, the more serious a tenant is about buying on or before the lease expires," he says.
Although an offer of a minimal deposit is acceptable, an offer for incremental deposits should be considered for additional option periods. In addition, while the home is leased, the rent collected by the seller covers most or all of the monthly mortgage payments on the property.
"A major benefit for both buyers and sellers is that a Lease Option allows immediate occupancy for prospective buyers who would otherwise not be buying that seller's property," Canfora says. "This is particularly useful for contracts involving out-of-town buyers and transferred sellers." Not to mention those with two mortgage payments…ouch.
Since a Lease Option does involve the risk that the option will not be exercised, the agreement should require the tenant to notify the seller of his intentions within 30 to 60 days before the lease option expires. Then, the seller can begin marketing the property before the lease expires should the tenant decide not to buy. However, credit for payment of the non-refundable option funds, plus the rent credit, does give the tenant a strong incentive to complete the purchase the property.
“Since the seller is providing financing terms to assist the buyer, the buyer often is more willing to pay a reasonable sales price”, according to Canfora. "Buyers seem to understand the concept of trading price for time and rent credit, which can make it easier for the seller to get the property sold," he says.
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