Lease Option for Buyers in Indianapolis
In a follow up to my previous post about Lease Options, let’s talk about the benefits and risk for the buyer in a lease option situation. Many of the buyers who I speak to who are interested in a lease option, are sincerely looking to get out of a rent situation and start applying equity toward their own home. Like most of us, they want a place they can call home. Somewhere they can put down roots, make memories, plant a garden, and not have to worry about rent increases or where they will go at the end of their rent term.
The biggest misunderstanding most have about the lease option process is the amount of down payment they will need and the monthly payment. In a true lease option, the down payment can be a considerable amount, anywhere from 2–10% of the purchase price, sometimes more. An example from a recent client. The home was priced at $156,000. The seller wanted $5000. down and $1500.00 a month in payments. The monthly payments would be about $250. more a month than if they were to purchase. With $150 a month being applied to the purchase price at the time of purchase, the buyer would have about $8600 toward down payment and/or closing costs at the end of a two year lease. Assuming they were in a position to buy outright with the same $5000. to use toward closing costs, and a 7% interest rate, they would have paid less for the home upfront and their payments would have been about $1250 a month. These are esimates and depend on the specific loan program, taxes and insurance of the property.
When you purchase a home through lease option, you lose power in negotiating the purchase price. Whether the purchase price is determined at the beginning of the lease option or is subject to appraisal at the end of the lease term is negotiable and is a term of the lease you want to clearly define. Having a good understanding of the Indianapolis real estate market is crucial in determining which is best for a particular home and your situation. In the above scenario, let’s assume the price of $156,000 was established up front in the contract. If after two years of making payments toward the purchase price, you decide to exercise your option to purchase and the appraised value was $149,900, you have lost $6100.00 in value. Since every lender will require an appraisal, you now only have $2500.00 toward your downpayment and/or closing costs. If the terms of the contract established the price was subject to appraisal at the time of purchase, you would still have your $8600.
There are both pros and cons in a lease option for buyers. Having a professional to assist you in determining value and guiding you through the contracts and negotiation can help you better decide whether lease option is the right decision for you.
That was a great and clear example of how a lease option works. Lease options are usually not the best way to go, but for buyers with credit problems, they may be preferable to renting.
Karl - While most buyers do lose some negotiating power in a lease option, they can be a great alternative to renting. Having good representation by someone who knows the market can save a buyer money in the long run.
Thanks for the great explanation of lease options. It sounds like this may not be the best option for most folks but I am sure there are some exceptions.
Paula I find the same thing here with buyers not understanding the down payment. Most think in terms of a damage deposit which would just not be enough. - Ashley
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