Pros and Cons of Lease Options for Tenant/Buyers

(My Original Blog Post: http://ping.fm/A0KFF)
Pros of Lease Options for Tenant/Buyers-The pros of a lease option for a tenant buyer is that they can gain equity by locking in a price today.  A locked in price with the addition of appreciation can really leave a lot of equity for a tenant buyer years later.  An investor buyer could put unlimited amount of lease options under contract in theory.  The buyer doesn't have to follow thru on the property and exercise the option if they choose not to.  If the buyer feels the house is not the right house, or has gone down in value or not up in value at all, the buyer can choose not to record the option, this is a huge advantage and pro to the buyer.  The buyer may also build equity through monthly rental credits if the seller and buyer agree to do so.  I personally don't do this as the buyer or seller, but the way it would work is that a portion of the monthly rent could go as a credit towards the purchase price of the property, lower the property price by "x" amount per month, and at the time of purchase the purchase agreement could be agreed on at a lower price. This gives the tenant buyer a chance to build in extra equity in addition to their option money.  If the lease allows subletting the tenant buyer could allow for some help from other tenants or roommates to help pay for things.   Lease Options are great for buyers , and allows them to control one or many properties for a fairly affordable price.  Most lease option properties are in pretty good condition, so this is a great concept.  Most lease options allow 1-3 years to allow for the tenant buyer to increase their credit score, so that when it's time to finance they can get financing and a much more competitive interest rate.

Cons of Lease Options for Tenant/Buyers- The cons of a lease option for a tenant buyer on a lease option is that the landlord can still evict you if you don't make the payments.  Evictions don't take that long.  If the tenant buyer has more money to put down, they may want to do a contract for deed, where the cancellation process is longer than an eviction.  Tenant buyers have to put down option money which is almost always non refundable.  As another negotiable item some landlords may not count the option money towards the purchase price, or may not give rental credits. The tenant is able to at least try to negotiate this with the seller.  Tenants still have to consider that when they make payments to the seller, they have to have checks and balances in place to make sure the seller is making those payments to the bank.  Sellers have been known not to do this and keep it and have the house go into foreclosure, but this is true of any rental situation, tenant buyers need to just double check this with landlord / sellers.  Tenants put down option money, if they don't work really hard on their credit score to improve it, they may not be able to get financing in the near future.  Another disadvantage for a tenant buyer is that based on some situations with their previous house, whether it was a short sale or full foreclosure, they may not be able to get financing for quite a few years, and the lease option may have been written for far too short of a period of time, when they needed longer to allow for financing and the foreclosures to come off their record, credit report, or not disqualify them for financing.  Another disadvantage for a tenant buyer is if they have very little option money they may have very limited choices on which houses to choose from.  If they have less than $3000-$4000 option money they may have to go search and find sellers themselves, they maybe can't work with an agent, since their is not enough money for an agent to be paid on the transaction.   The possible biggest concern for a tenant buyer on a lease option is that at the time of closing they still have to be concerned about the title work on the property.  What I mean by this is who are all of the sellers, are they around to sign as sellers on the property, has anyone been recently divorced or deceased. Is there a need for a power of attorney.  Are there sellers in other countries.  Will the sellers participate when the time comes.  Will the sellers feel like they have too much equity.  Will the property be encumbered with a lot of liens, IRS liens, judgments or anything else from the property itself or from the seller's credit situation.  This could happen at anytime during the years that you have an option on the property.  Their are advanced ways to get around this, too much to cover in this article, but it would require anything from having the seller pre-sign a deed and put it in escrow with a title company at the original time the lease option is signed.  If there is a divorce, etc you may have to check with an attorney or title company if everything still needs to be resigned before closing.  Some protection of judgments and liens can be avoided with the use of land trusts with conveyance from the original deed where the seller remains the beneficial interest.  Land trusts are for another blog post.   Learn to get to know the seller, trust them, and become good friends.