There is an increasing number of people and companies now getting involved with lease options and rent to own. For many the concept is totally new, and most of those who have heard about lease options do not know how they actually work to the benefit of everyone involved. So here we will explain some more.
Firstly “rent to own” or “rent to buy” (both refer to the same thing) are processes by which a tenant takes on a property in a similar way to a normal tenant, but additional with the right to become the owner of that property. The right to own the property is where the lease option comes into play. The option is the legal contract that provides the holder of the option (e.g. the tenant) the absolute right to execute that option at a later date. So how is the option set up?
The option itself is very flexible in how it is constructed. There are several components to the option, these are:
- The date by when the option has to be executed. If the option is not executed on or before this date the option will lapse (e.g. the tenant will lose the option). The date by when the tenant has the right to execute the option is defined in the lease option contract, this can be anything from a few months to many years.
- The option price, this is the price at which the property can be purchased. Often the option price is at or below “today’s market price” where the date for execution is in the near future. This makes sense if for example you have the right to buy at anytime in 12 months, you would probably not expect property prices to by much higher than they are today (August 2009). But if the option is for a longer period, say 5 years, then it is reasonable that the option to buy price is set at a price considerably higher than today’s property price – but of course below what you would expect the property to be worth in 5 years time.
- The option fee. This is the amount paid to be given the option. Usually the fee is quite low, maybe similar to the amount for a normal rent deposit, sometimes higher.
The lease, this is in effect the rental agreement for the property. This agreement will state what the monthly rent is, in some cases a component of the rent is accumulated and then deducted from the eventual purchase price, in effect allowing the tenant to save toward a deposit.
The key for the tenant taking on the lease option contract is for all parties to negotiate terms that agreeable to everyone involved. The advantages are clear, especially for the tenant-buyer, they are renting a property which will become their own property at a future date, allowing time to save for a deposit and improve their credit ratings to take on a more competitively priced mortgage.
We will soon be publishing details of training courses, workshops and training packs for those interested in lease options. If you would like to know more email service@simple2buy.co.uk
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