Considering a lease option or rent to own can help jumbo mortgage borrowers save for a higher down payment and get their credit history in order to prepare for their dream home later on. This is a great option for many potential homebuyers if they are delaying their home purchase for a while. A lease-option can give future buyers the opportunity to say for a higher down payment or perhaps get their credit in order in case they need to increase the score to qualify for a jumbo mortgage.
This also helps them lock-in on a future purchase if they plan a rent-to-own option. Sellers can agree to a lease-option as a way to cover their mortgage payments or make additional income until they’re ready to sell, factors in the market change or the buyer is ready to purchase.
How does a luxury lease work?
Leasees or renters will agree to a lease option that allows them to buy or walk away from the property at the end of the term. Most terms are typically between 1 to 3 years. Renters will pay a deposit or “option consideration” of about 2% of the home’s market value. This deposit can be credited toward the down payment if the home is purchased at the end of the term. If the renter decides not to purchase, the seller will keep the deposit.
Rental payments can be higher than a typical mortgage payment for comparable properties in the market. This payment portion above the market rate can be applied to the home purchase. It’s ideal for folks looking to commit to renting a property for a specific period of time with the option of buying before the lease ends.
A lease-option contract can give buyers the right to purchase the home when the lease expires and it will include a standard lease agreement as well as an option to buy an addendum at a later time.
Every contract is different and some may require the renters to maintain the property and pay for repairs. All details of the contract should be explained and understood by both the homeowner and the renter before agreeing to the terms.
Lease option versus lease purchase
There are different types of rent to own contracts. A lease option contract gives the renter the right but not the obligation to purchase the home when the lease term expires. If the renter decides not to purchase the property, the option expires and the renter can walk away without any obligation to pay additional rent or to purchase the property.
A lease-purchase contract is a little bit trickier and could legally bind the renter to purchase the home at the end of the lease whether you can afford it or not. A lease option is always a better bet for the renter.
Agreements should be specific when talking about the home’s purchase price. The renter and the seller/homeowner will agree on a purchase price when the contract is signed, often at a higher price than the current market value. The renter will pay rent through the lease term and may or may not set aside a portion of each payment for the purchase but this will be a term in the contract.
Depending on the terms of the contract, renters may also be responsible for maintaining the property. While this is typically a landlord’s responsibility, a lease to own option is slightly different
If you choose to purchase the property at the end of the lease term, you’ll need to obtain a mortgage or other type of financing in order to pay the seller/homeowner in full. If you decide not to purchase the property or are unable to secure financing, the option will expire and you’ll need to move out. As if you were renting any other property, you’ll most likely forfeit any money paid up to that point including the option money and any rent credit accrued.
Contact me below for more information on luxury lease options in LA or to list your home as a luxury lease.
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More Resources for Home Sellers:
- 4 Major Condo Buying Tips
- How to Sell an LA Home
- How COVID Has Affected the Hollywood Hills Real Estate Market
- Top 5 Qualities you Want in a Luxury Real Estate Agent