What is a lease/option (aka rent to own)? A buyer/tenant will pay an option fee and a premium over rent with the intention of purchasing a property. The option fee and a portion of the monthly payment will be converted to a down payment at the end of the lease. When the buyer/tenant exercises their right to purchase, the home will be purchased via a conventional loan.
Here are the primary terms used in a lease/purchase.
Option Fee |
This fee is the amount of money needed to "put an option" on a property. This non-refundable fee is converted to a down payment at the end of the lease. |
Rent Credit |
This is the portion of the monthly converted to a down payment at the end of the lease. |
Lease Period |
The lease period is agreed upon in advance. This is usually the amount of time required for the buyer/tenant to bring their credit up to at least 650. |
Purchase Agreement |
There are 2 "flavors" of purchase agreements. The purchase method is decided upon BEFORE the option fee is put on the property. |
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Appraised Value |
At the end of the lease, the property will be appraised by a third party who is a licensed appraiser. Another variant is to have the price the average of 2 appraisers chosen by both parties. The advantage to an appraised value method is that it's fair. The disadvantage is that the price could go up or down as the market fluctuates. |
Set Value |
The price is agreed upon in advance regardless of what the house is appraised at. The advantage to this method is that the price is no mystery. The disadvantage is that a buyer/tenant could potentially pay too much for a house. |
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