cautious with lease-purchase deal
With the high prices for homes in Southern California, we've been
looking into other alternatives to be able to purchase. But with
median home prices approaching $600,000, what do you think about
-- Grace Gravitate
A lease-purchase agreement on a home can be a win-win contract for
both the homeowner and the lessee. The big questions here are: Do
you want to lock in a price when the market looks like it's starting
to soften and mortgage rates are poised to head higher? And what
are you willing to pay for that privilege?
The contract can be structured in a multitude of different
ways, but it's common for part of the monthly rent payment to be
applied to the purchase price of the home. That allows you the potential
to build equity while still renting.
The option to buy the home out of the lease is generally
in place for the term of the lease. The price paid for that option
is set at the beginning of the lease term, along with the price
of the house, etc. In some contracts the option price is a set,
nonrefundable dollar amount. In others, it is built into the monthly
You need to look at the seller's motivation in arranging
a lease-purchase agreement with you. By providing a lease-purchase
option, they may be able to set a sales price for the home that
is higher than the price they would receive from a cash buyer or
a person using conventional mortgage financing. That above market
price is part of your cost for the option, should you eventually
buy the home. Paying above-market rents is another explicit cost
of the option.
Sellers would prefer not to use lease-purchase financing,
even with the higher rents and the option money. In hot markets
it's not widely used, so you should be cautious in entering into
this contract. You know your local real estate market better than
I do, but using a lease purchase to lock in today's price on a home
may not be to your advantage.
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