What is a lease to buy option in real estate

A difficult real estate market often forces buyers and sellers to get creative with financing. One example of this that I see occasionally is a lease to buy agreement.

Let’s say you’re trying to sell your home. It’s a tough economy and no one will pay the price you’re asking, even though you’ve priced to sell.

Along comes a potential buyer who truly loves your house. And this is a great time to buy, with interest rates low and home values down. But there’s a problem: He doesn’t have the 20 percent down payment his lender requires, in order to get a loan.

At this point, you, the seller, could drop your price even further—which is painful. The buyer could sit on the sidelines while saving for a down payment—and miss out on the house of his dreams.

In this situation, neither seller nor buyer wins. That’s where a lease to buy agreement comes in.

Paying rent, plus additional money

In a lease to buy agreement, the buyer agrees to rent the seller’s house for one year (or sometimes more). In addition to paying rent, the buyer agrees to pay the seller an upfront payment, which is sometimes 3 percent of the purchase price.

The upfront payment is like a security deposit. It goes toward the purchase price or down payment of the home. However, it’s usually non-refundable, should you try to back out of buying the home at the end of your lease agreement.

In addition to the upfront payment and monthly rent, a buyer might agree to pay the seller additional money each month toward the purchase price.

Benefits for the seller

The seller wants to sell her home and move on, of course. But when that doesn’t happen, a lease option allows her to find an eventual buyer. That means she doesn’t have to keep holding open houses or worry about whether the house will ever sell. Plus, the seller gets her asking price (when the house is eventually purchased). And she gets money every month in the form of rent—money she wouldn’t have earned by simply selling the house.

Benefits for the buyer

The buyer gets to lock in a price for the house he’ll eventually purchase. He also gets to start living now in the home he loves, as opposed to seeing someone else buy it because he couldn’t afford the down payment. And it gives him time to save up money for the full down payment, which is necessary to secure conventional financing. Yes, the buyer has to pay rent. But if this were his first home purchase, he’d pay rent somewhere else anyway.

Talk to your Realtor

In most cases, you don’t need to hire an attorney. There are standard lease to buy contracts out there. Your Realtor should be able to supply one that suits your needs.

WikiHow has an article that explains more about lease to buy options.

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