A lease option agreement is sort of a rent-to-own deal. You rent the property from the owner for a fixed period (usually no more than a few years), at the end of which time you have the option to buy the property. Normally, the seller requires some sort of down payment (often less than a typical mortgage lender requires), which should be applied to the purchase price, along with monthly rent equivalent to about 1 percent of the purchase price.
A lease option agreement can be a great way to finance the purchase of an investment property, assuming you’re working with a seller who deals aboveboard, and you have a great plan in place for obtaining cash or alternative financing by the time your option to buy the property rolls around.
So how does a lease option work? The monthly payment consists of rent plus some additional money that’s applied to the purchase price. In other words, if the going rate for rent on the property is $1,000 per month, you may have a monthly payment of, say, $1,500 with the extra $500 being added to your down payment. This ensures that you’re building equity in the property during the lease part of the agreement, and it provides the seller/lender with some security in the event that you back out of the deal.
Make sure that the lease option agreement is very specific regarding the application of payments and terms of exercising your option. Otherwise, you may lose a lot of money in rent that you assumed was being applied to the purchase price or lose your option to buy on some minor technicality. Have a qualified real estate attorney look over the agreement before you sign it, and make sure you understand it completely.
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