If you want to own your own home but can't obtain traditional funding today, leasing a property with an option to buy may be the best choice. A lease purchase could make your lease money work for you rather than helping to make your landlord wealthy. Normally lease to own homes offer rent credits that will reduce the final purchase price!
Here is how it works:
A property is made available via a typical lease along with one important addition. Included is an option to buy that property at a specified price spanning a specified period of time (generally a few years). To be able to acquire that option, the renter/buyer have to pay a single time, NON REFUNDABLE, charge referred to as the option consideration. The precise sum is negotiable, but it is normally varies from 2.5% to 7% of the purchase price. A good agreement will credit the purchaser 100% of that option consideration right after conclusion of the sale. In addition a negotiated proportion of all lease transactions is generally applied toward the purchase price of the home. A few typical terms and conditions one could expect to find in a agreement follows:
* To be able to receive a lease credit of 50%, time is a critical factor. You have to pay your lease on or Prior to the due date of the lease (often the 1st of the month). This implies it has to be received by the lessor (landlord) on or before the due date. Any payment obtained following the due date may result in a 0% lease credit for that particular month, a late fee may apply and you may not be generating any kind of resources.
* Upkeep is the responsibility of the Tenant Purchaser. You are at the moment leasing to own and homeownership needs servicing. This consists of things such as shattered windows from stones or even baseballs, clogged drains, peeling paint, damaged appliances, burnt out bulbs, lawn work, etc. Should any major maintenance are required to ensure habitability, the owner remains responsible.
* You need to have Option Consideration. Option Consideration is typically 2.5% to 7% of the purchase price of the home. It is a non-refundable payment, of which 100% is credited toward the purchase price, which binds the lease purchase agreement.
Here's an example transaction:
You come across a pleasant 3 bedroom, 1 bathroom single family home located in a great neighborhood with excellent schools as well as a strong community members. It has been freshly painted, cleaned up, and is all ready for you to occupy. The purchase price is going to be $215,000. Monthly lease payments will be $1,500 and you will get a 50% lease discount ($750 per month). You will need approximately 2.5% and 7% in advance Option Consideration. Suppose your budget allows for $6,000 for Option Consideration. This equates to approximately 2.8% ($6,000/215,000). In addition, you will also need $1,500 to cover the first months lease for a total initial payment of $7,500.
Please note: Option consideration is not a security down payment. It is a non refundable payment that goes towards the purchase price and is 100% credited toward decreasing the price of the property.
Now let's assume you settled all your monthly lease payments on or ahead of the due date and you opt to buy the lease to own property at the end of the 12 month lease purchase agreement. You should have $15,000 in equity prior to you even take posesssion of the property! Here's the calculation:
Lease Purchase Price - $215,000
Less: Option Consideration paid at lease signing - $6,000
Less: 50% rent credit of $750/m x 12 months - $9,000
Net Purchase Price after credits - $200,000
You began with $6,000 and by paying your lease on time; your equity position increased 150% (another $9,000) for a full amount of of $15,000 with 12 months. Not a bad arrangement! Many people find it almost impossible just to save $9,000 in a year with all the costs of living regularly increasing.
What's the catch?
Now you could be thinking, "OK, what's the catch? This seems too good to be legitimate."
Answer, there is no catch.
There are lots of likely reasons a landlord/seller might want to get into a lease to own arrangement. A few factors may be:
- Needs to preserve ownership for at least 12 months for tax purposes.
- Cannot get a fair price as a result of local circumstances.
- Tired of undertaking minor maintenance.
On top of that, when someone sells a property by using a realty service, a commission of 5%-7% is usually paid. In the illustration stated above, this may cost you more than the lease credit. Because real estate agents are often not associated with this type of transaction, there is no commission and the landlord can afford to pass along the savings to tenant/buyer in the form of lease credits.
Also, as soon as the Tenant becomes the Tenant Buyer (by way of lease to own), they have an instantaneous sense of pleasure in ownership. Tenant Buyers add value to the local community. They look after their future property, make improvements, and feel good realizing their lease money is earning a living for them (decreasing the purchase price) as opposed to just making their Landlord wealthy.
In addition there are numberous perk for the renter:
- Build equity toward owning a home.
- No bank or finance company involvement.
- Poor credit record might not be an issue.
Milan Doshi has trained millions of people around the world to become savvy in property investment. Seasoned investors and newbies wanting to know what is property investment will benefit from attending his Property Intensive seminars organized by Wealth Mastery Academy, that has opened up the minds of many to the opportunities available in property investment.
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