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Is Leasing With The Option to Buy A House A Good Idea?

By Erik Folgate

A Money Crasher’s reader sent me an email the other day with this question, so I thought that I would share my opinion with all of you.

Are lease-purchase homes a good idea? I recently heard of them, and I am wondering if that would be a good option for us.

It all depends on the situation, how committed you are to actually purchasing the house, and the terms of the agreement. I wish that I could just say a simple “yes” or “no” to the question of whether leases with the option to buy are a good idea, but like everything else in life, it’s complicated. Here are some advantages and disadvantages to leasing a house with the option to buy.

Advantages:

  1. It helps buyers with no down payment to build up a down payment while still enjoying the comforts of being in a house with land.
  2. If agreed upon by the owner, you can make changes and improvements to the property but still have large maintenance issues covered by the landlord.
  3. You can get to know the neighborhood and neighbors before signing the dotted line for ownership. I am sure some of you can attest to buying a house, then realizing that the neighborhood wasn’t as safe as you thought it was or your neighbors turned out to weirdos.
  4. It will be very easy to document your prompt rental payment history to a mortgage lender if they need additional documentation to help you qualify for a loan. Sometimes, those with damaged credit, foreclosures, or bankruptcys on their credit can receive approval for a mortgage if they can prove steady, substantial income coming in and a flawless two or three year history of rental payments.

Disadvantages:

  1. Generally, lease-to-own house agreements will come at a premium price. Generally, a landlord will draw up a lease that will include a portion of the rent that goes to the landlord and a portion that will go towards your down payment. The landlord should offer the fair market value for another rental house of that size in the area, plus whatever extra you want to pay on top of that to go towards your down payment. However, some landlords will try to ask for more rent than what is normally considered “fair market” for that area, which means your paying more in order to save towards a down payment with no interest.
  2. You might decide that you don’t want the house, and then your stuck in a lease with possible penalties for not buying it.
  3. The Federal Housing Administration limits the amount of rent that you can apply towards a down payment if you look to buy an FHA loan. With conventional mortgage loans for a bank, there are no restrictions or limits other than what is agreed upon in the lease agreement.

Conclusion:

If you are not itching to get into a house and you found a house that you love that’s in your price range, ask the landlord if they would be willing to accept a lease-to-own deal. Just make sure that they are willing to work with you on the terms of the agreement. If the deal seems fishy, or the landlord is really pushing a lease-to-own agreement, then there may be red flags to be raised. Be cautious about getting into one of these agreements, and if you do enter into one, it would never hurt to have a real estate attorney look it over before you sign it.

Erik Folgate
Erik and his wife, Lindzee, live in Orlando, Florida with a baby boy on the way. Erik works as an account manager for a marketing company, and considers counseling friends, family and the readers of Money Crashers his personal ministry to others. Erik became passionate about personal finance and helping others make wise financial decisions after racking up over $20k in credit card and student loan debt within the first two years of college.

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Comments

  • Minimum Wage

    Your position is improved if you negotiate an option which is assignable or transferable. If you do, you can transfer the option to someone else to recover some of the money you have paid into it. If you don’t, you’re stuck in the contract and will lose all the money if you don’t actually buy it.

  • author

    great point minimum. Again, that is why I stress that you ask an attorney or real estate agent to help you put together a lease agreement with the owner if you want to get into one of these deals. Make sure you don’t get screwed over if you change your mind on it.

  • http://madsaver.com Mac

    Gotta say, I love sifting through the archives on this site. There are a lot of gems here and most help regardless of when they were posted. I have a friend who’s looking into a lease-to-own arrangement and I didn’t know anything about it until now. Never really sure how they worked, but makes sense now! It’s all about the contract in this kind of agreement…do you lose the down-payment if you don’t buy? Are there add’l fees? Really have to scrutinize the plan.

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