Is it a good idea to lease with an option to buy?
You have been renting your home for awhile now and you really like the place and the location. You may have talked with your landlord about wanting to purchase the home. Sounds like a good idea, you may not have the money necessary for the down payment and closing costs. Paying a little extra above your monthly rent for the down payment sounds like an attractive option. As in all big decisions should evaluate the pros and cons. The pros, unlike the cons, are easy to grasp. The pros; you stay in the home you love and by paying a little bit more a month you are saving for the down payment and are buying time to qualify for the mortgage. The cons are however not as easily discerned. So here are some things you should consider when deciding if lease-to-own makes sense:
Loss of Money Paid to Seller
It happens, you are late on the rent or miss a month or violate the lease that allows the landlord to cancel your lease. In that event you will likely forfeit all the funds paid to the seller, not good.
If the landlord has a mortgage, the lender may prohibit the owner from entering into a lease-to-own agreement. You should have the landlord confirm with the lender that a lease to own arrangement is allowed.
Acts of of the Seller
What happens when your landlord isn’t paying the mortgage? What happens to the money you have paid if the lender forecloses on the home? Chances are high that if the seller isn’t paying the mortgage, your prepayments funds are long gone. Same problems with seller bankruptcy, your rights to the property may end.
What happens if the seller dies before you can exercise the right to purchase the home? You may not get clear title which will be required to exercise the right to purchase.
The seller may take out a second mortgage or transfer ownership rights to another buyer. If your financial interest in the property (the amount you have paid as the down payment) is not recorded in the courthouse, a new buyer may take title to the property free and clear, cutting off your rights.
Since you are going to be the owner one day you decided to spend money redoing the kitchen. If any of the above items occur and you end up not purchasing the home, the seller is not required to reimburse you for the improvements, even if you are evicted.
How to Protect Yourself
Have an attorney review your agreement. There are quite few risks associated with lease-to-own, you need to understand the agreement and the associated risks.
Obtain title insurance. The title insurance firm will research the title to ensure the seller has clear title or what is called “marketable” title. This means that there are no other claims on the property, liens, etc.
Have your financial interest recorded in the local land records, the title company can assist with this. By doing this you are staking your claim to a share of the home. However, most landlords/sellers will object as this may not be allowed by the lender and will cost the landlord money.