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FAQ’s

Frequently Asked Questions

How Does a Lease Option Work?

 First, the buyer/tenant and the seller decide on a home purchase price. Then the parties set up an Option Agreement, which outlines the fee the buyer pays the seller for the option to buy the home at a future date. Then, the tenant/buyer signs a Lease Agreement which outlines the terms of the lease period. The Lease or Rental Agreement will spell out the monthly rent payments; and what portion is credited toward the future purchase price. These credits are used toward the purchase down payment. The buyer/tenant moves in to the home, making monthly rent payments and accumulating Option Credits. At the end of the lease period, the renter obtains financing to execute a Sales Contract to buy the home.

What is an Option Credit?

 An Option Credit is the portion of the total monthly rent paid that is applied to the final home purchase. For example, if a monthly rent payment is $1500 and Option Credits accrue at $500 per month, then, over a 36 month lease, the renter will accumulate $18,000 in payment credit that can be deducted off the purchase price, or used toward the down payment, if the renter opts to purchase the home.

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What is an Option Fee?

The Option Fee is a payment from the Buyer/tenant to the seller, before the tenant moves in. This fee amount is negotiable. The Option Fee gives the buyer/tenant the exclusive right to choose to purchase the home at the end of the lease period. The seller may not sell the home to another party during the Option period, and the renter may ultimately opt out, or not buy the home, however in that case the Option Fee is usually forfeited to the seller.

Who pays home insurance and real estate tax during a rent-to-own?

 The owner/seller is usually required to maintain full insurance and pay all property taxes and other fees, such as HOA (home owner association) dues as necessary.

What Agreements are needed for a Lease Option situation?

 There are three components to a rent to own. These are often spelled out in individual agreements, called the Rental Agreement (which outlines the terms for leasing and occupying the home, plus the rental rate and Option Credit accrued from the rent), the Option Agreement (which details the payment amount the renter must make to secure the option to buy the home after the lease ends), and a Sales Contract (to specify all terms of sale, including but not limited to the sales price, title, financing and seller or buyer obligations).

What types of buyers benefit from rent-to-own?

 The buyers find rent to own attractive include:

  • People, who have been turned down for a mortgage, but expect to qualify in the near future, and want to settle into a home.
  • Buyers who expect to maintain and will work to improve their financial standing (FICO score, credit rating, save for down payment) during a lease period with the goal of attaining an affordable home mortgage loan.
  • Buyers with good credit and some savings available, but not enough for a full down payment on a home loan.
  • People who are handy at repairs and maintenance that can build up and apply the dollar value of their skills toward a home purchase price.

Does the buyer have to buy the home at the end of the lease?

 The answer is usually no. The lease option should allow the buyer the option to leave after the lease is over.

What happens to the Option Fee and Credits if the buyer doesn’t purchase the home?

 The Option Fee and any Credits earned or accumulated are typically non-refundable if the buyer does not purchase the home. The fee and credits act as incentives for the buyer to complete the purchase, and protect the buyer by maintaining exclusive access to the home purchase.

What is monthly rental credit?

 Many rent to own agreements feature a provision that sets aside a fraction of the monthly rental payments as credit toward the purchase price of the residence. This amount varies from situation to situation, yet it may be as great as up to 50 percent of the rental payment. This provides homebuyers with the benefit of creating equity while renting.

What is the length of the option?

 2 to 5 years are typical. It often takes more than a year to clean up your credit, accumulate sufficient option credits, and position yourself to buy a home.

Can I extend the option if I’m not ready to purchase and the end of the option period?

 Usually, you may but, it probably would come at an extra cost, to extend the option period.

Who is responsible for repairs on the property?

 Often, it’s set up so that the tenant-buyer is responsible for minor repairs, with the owner responsible for the larger concerns.

How much of my rent payment is credited toward the purchase price?

 This is negotiated. You do want to make sure at the end of the term there is a sufficient amount going towards the down payment.

How much up-front option money do I need?

 Also negotiable. Often, it’s the equivalent of 2-4 month’s rent

If I don’t buy, what happens to my up-front option fee and my monthly option credits?

 You lose them in most cases. Almost all lease-options are written so that the tenant-buyer forfeits any option fees and credits if he/she doesn’t exercise the option.

Should I take the Lease option documents to my lawyer?

 Yes.  As with any real estate transaction or major purchase you should have an attorney review the documents

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