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A "lease
/option" is really two separate but related
agreements: a "lease agreement" and an
"option agreement".
A LEASE AGREEMENT is just a
standard agreement to rent a home. In general, a lease
agreement gives you the right to live in a home in
exchange for payment of rent. Typically, move-in charges
to rent a home might look like this:
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Security Deposit
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$1,000
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(Refundable)
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One Month’s Rent
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$1,500
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(Non-Refundable)
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Cleaning Fee
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$ 250
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(Non-Refundable)
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TOTAL MOVE-IN
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$2,750
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An OPTION AGREEMENT is the right
to purchase the home within a specified period of time for
a fixed purchase price . For example, the option agreement
could state that you had the right to purchase the home at
any time before March 1, 2006 for a purchase price of
$400,000. There would be an initial option payment of
$8,000 and, in addition to your rent every month, there
would be Additional Option Consideration of $250 per
month. Therefore, the total monthly payment might be, for
example, $1,500 rent + $250 additional option
consideration for a total of $1,750 per month.
Although all the option money paid is
non-refundable, as long as you arranged for financing with
a bank and the home is purchased by the agreed date, all
the option money paid applies to the purchase price. The
advantage of this option program is that it gives you time
to save up for the down
payment (and time to improve your credit, if needed). In
the meantime, your purchase price stays fixed. For
example, a 12 month option on a home with a $400,000
purchase price might look like this:
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Option Consideration
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$8,000
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(Non-Refundable)
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Additional Option Consideration:
12
Months @ $250=
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$7,500
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(Non-Refundable)
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TOTAL PAID
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$15,500
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(Non-Refundable)
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This $15,500 is available to be applied
to your purchase of the home and represents more than 3.75
percent of the example purchase price of $400,000.
Depending on your credit and other factors which a lender
may consider, this amount of cash is generally enough to
purchase the home. (Many lenders have 3% and/or 5% down
programs).
With a "lease / option"
agreement, your move-in charges might look like to this:
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Option Consideration
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$8,000
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(Non-Refundable)
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Security Deposit
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$ 300.00
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One Month's Rent
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$1,500
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(Non-Refundable)
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Cleaning Fee
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$ 50.00
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TOTAL MOVE IN
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$9,850
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So, in this example, your total move-in
would only be $7,100 more with a lease option than with a
standard lease agreement. The additional option
consideration of $250 per month would then start the first
month after your move-in.
Another advantage of the lease option
program is that the home price is fixed from the start.
This means that if market inflation causes the home price
to increase higher than the set price, the bank could
consider extra value as your equity towards your purchase
of the home. For example, if the purchase price for the
option is set at $400,000 (as in the example above) and
the home increases in value within the 12 month option
term to $440,000, you would be able to buy a $440,000
house and pay only $400,000 for it.
NOTE: Lease option agreements are a
great way for you to save your way into home ownership,
but these agreements are not for everyone. If you move out
of the home during the option period for any reason or if
your option payments are late, your right to purchase the
home terminates. Be certain that you fully understand the
terms of the lease option agreement before signing such an
agreement. It is important to understand your own
commitment and determination to see the option to
completion before you begin. However, if you know what you
want and are willing to work for it, this is a great way
to afford a new home in a short period of time - and to
live in it while you set aside money to buy it.
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