Lease to buy a house: What’s the catch?

Money in your handsDear Real Estate Adviser,
I’ve been leasing a house and will soon have an option to own at the end of the lease, provided I come up with a down payment of $10,000. I’m a little nervous about this. Is there a catch to this lease-to-buy program? I don’t want to miss an opportunity to own, especially since I have less-than-perfect credit.
-Andrea N.
Dear Andrea,
There are a lot of folks outthere right now with challenged credit, still reeling from the downturn, who could execute a lease option as a legitimate pathway to ownership. In fact, there’s been a surge in demand for lease-option arrangements in recent years because of tight credit markets. Many sellers offer this program as an alternative in their for-sale listings. But there are some caveats to these lease-to-buy arrangements.

Typically, a lease option gives an aspiring buyer the option to buy a home at a set price following expiration of a lease term of a year or more. In most cases, the would-be buyer pays an additional premium above the monthly rental rate during that lease period. These extra payments are to be applied to a down payment. Renters may be asked to pay an additional “option-money” fee.

However, in your case, that sizable down payment you’re faced with seems to indicate that your landlord/seller is personally offering short-term financing as part of the arrangement. That would account for the large end-of-lease-term balloon payment — or “down payment” — of $10,000 that’s being asked of you. After that payment comes due, the buyer in a short-term financing deal is generally expected to borrow the balance of his or her purchase with a bank or private lender. If that’s the case, talk with a lender posthaste about possible financing.

Or, it could be that the landlord is offering full-owner financing and is acting as a private lender to allow you to purchase the home over a long-term payment plan. You may have to settle on some sort of hybrid arrangement; parties are free to structure these deals any way they want.

With this much money on the line, it might be a good idea to have an accountant, agent, real estate attorney or similarly qualified professional take a look at your contract, especially since you are apparently not clear on some of its implications. I’d also suggest you talk with the owner to make sure your mutual expectations are lining up and that you have not violated the accord with late payments or anything else.

Values are generally heading north, so this deal might work in your favor because you may be locked into a sale price that’s lower than what the market currently bears. It would also behoove you to study the state of your local market to see if home values and home sales are on the upswing. Many real estate agencies will offer you market statistics as a courtesy, in hopes of getting your business. Or you can find that data online yourself by examining community data on your local chamber of commerce’s website or reading real estate reports in your local daily newspaper or business journal. A courteous call or email to a residential real estate appraiser might net you such market data or links or referrals to it.

Here’s one big caveat to consider: If you do withdraw from the deal, know that you will likely lose any premiums you paid toward a down payment and any option money. In many lease-option deals, unfortunately, hopeful buyers find they’re still unable to buy the house for essentially the same reasons they couldn’t conventionally buy one in the first place: poor credit, insufficient income or both.
But here’s hoping you’re now on improved financial footing and that you can complete the deal if it’s really in your best interest.

Steve McLinden

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