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A lease is simply combined with an "option to purchase" the property at a future date (usually two or three years) at a pre-agreed-upon sales price.
A lease option has four major provisions.
1) The current sale price of the home.
2) The future date of sale (close of escrow).
3) The amount of "straight rent" and IF there is any additional monies to be credited towards the future sale price when the option is exercised.
4) Option Length: buyers may prefer a longer option period because it provides more time to:
a) repair their credit and job history
b) acquire any additional down payment
Sellers prefer a shorter option period because if the tenant buyers DO NOT exercise the option the buyers lose the option fee. The option fee is between 1 to 3 percent of the future sales price.
Buyers should also be aware that dishonest sellers actually can conspire with the property management company to only lease out to buyers that will almost certainly not be able (when the option comes due) close escrow.
The option fee and rent premium are viewed differently by buyers and sellers.
To the buyer: they are part of their future equity. Planning that they will exercise the option, the only cost is the “interest” ON THEIR DEPOSIT MONEY--- the tenant-buyers could have pocketed.
To the sellers: these payments are a guarantee towards the house selling AND will remain in great condition while the tenant-buyers occupy the residence.
Tenant-buyers are often known to make capital improvements (i.e. remodeling bathrooms and kitchens) in the belief that they will be capable of exercising their option and closing escrow on time.
This creates a future incentive for the sellers to drag out the transaction past the original closing date since the property value has increased.
In 20011, most cash strapped borrowers will be willing to wait for their financial situation to improve while the market appears to be heading further south.
Copyright April 2007 Daniel Dobbs, real estate broker.
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