How to Buy a House Using a Lease Option
Check for homes in your neighborhood., Ask a seller to consider a lease-to-own arrangement., Hire a real estate agent., Search online., Check why the owner is selling., Run a credit check., Analyze tax records., Pay attention to red flags., Get an...
Step-by-Step Guide
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Step 1: Check for homes in your neighborhood.
Homeowners often advertise their houses as lease-to-own.
Drive around and look at signs.
Typically, the sign will state the purchase price and the monthly rent.
Check all neighborhoods you’d like to live in. -
Step 2: Ask a seller to consider a lease-to-own arrangement.
Many sellers have never thought about leasing their home to a potential buyer.
However, if the market is slow, they might consider it.
If you find a home you love, then ask the seller if they’re open to a lease-to-own arrangement.Search websites to see if a home has been on the market for more than six months.
If so, the owner might be looking to earn some money on it, so a lease-to-own arrangement might be perfect. , Agents usually know about lease-to-own listings.They also might know of properties that have been sitting on the market for a long time.
Find a real estate online or in your phone book and schedule a consultation., Websites like IRentToOwn and HousingList contain lease-to-own listings.
You’ll need to pay a subscription fee to use many of these websites.
However, it’s a good option if you can’t find anything on your own and don’t want to hire an agent., Good reasons include the owner has bought a new house and needs to rent out the current property, or they are preparing to move for a job.
When you look at the home, you can ask in an off-hand manner why they are selling.
Listen for signs the owner is in financial trouble.
For example, they might be vague, or they might insist they need to get someone in the house fast.
If the owner goes bankrupt while you’re leasing, they’ll probably lose the house and you’ll also be evicted at the same time.
For this reason, you’ll want a seller who is financially stable., Ask the owner’s permission.
They might protest, but explain your concerns and refuse to go ahead until you run a check.
You can contact Experian, Equifax, or TransUnion to run the check.Look for a large debt load, such as maxed-out credit cards or accounts in collections.
These are signs of financial distress. , You can get property tax records from the county tax assessor’s office.
Make sure the person you’ve been working with is actually the owner.
Sometimes, fraudsters will pretend to own a home they’ve never even lived in! You can also check whether any tax liens have been placed on the property.Tax liens are huge red flags, so if you find any then walk away.
Look for other liens too, such as mechanic’s liens or liens placed on the property by someone who won a lawsuit against the owner. , Many fraudsters are looking for a gullible buyer, so you need to protect yourself.
Look out for the following signs that a lease-to-own arrangement is shady:
The seller wants to charge below-market rent.
The seller doesn’t want to check your credit history.
You’re charged an application fee.
You can’t understand the lease and the seller doesn’t want to answer your questions. , You want to know how much the house is worth, in case you agree to buy it at the end of the lease period.Obtain a referral to an appraiser from your real estate agent.
You can also search the directory of the American Society of Appraisers.
Costs vary, depending on your location and the size of the home.
Get a quote before hiring the appraiser., Uncover serious (or minor) defects in the home now.
It would be a shame to rent for two years and then find out the house has a major structural defect.
Your real estate agent can recommend an inspector, who will probably charge $300-600 for an inspection., A title report will tell you how long the seller has owned the house.
Ideally, the seller will have lived in the home for several years.
Someone who’s owned the house for a long time should have equity built up in the home and are probably more stable.Contact a title insurance company to get a copy of the title report. , You don’t need a mortgage now, while you are renting.
However, you’ll need one later, if you choose to buy the house at the end of the lease period.
Make sure your credit isn’t so bad you won’t qualify.A mortgage broker can review your credit history and predict whether you’ll qualify for a mortgage in a couple years.
They also might have tips for improving your credit in the interim. , Your contract will need to identify how much you will pay if you choose to buy the house after the lease period.
Generally, there’s two ways you can set the price:
You can put the price in your agreement.
Typically, you’ll set the price a little higher than the home’s appraised value to account for the increase in home prices.
This is risky.
The housing market might crash by the time you get ready to buy the home, but you still have to pay the amount in the contract.Alternately, you might decide to fix a price when the lease ends.
For example, you can have a second appraisal done at that time. , The option gives you the exclusive right to buy the home during the option period.
You’ll need to pay for this privilege, typically 3% of the purchase price.
For example, if the purchase price is $150,000, then you’ll probably pay around $4,500.Typically, the option amount is set off against the purchase price.
However, if you ultimately decline to buy the house, then you’ll lose the option payment., Lease-to-own contracts typically last from two to five years.However, it should last as long as necessary for you to improve your credit history so that you can get a mortgage if you choose to buy.
Look at your credit history.
Some negative information, such as collection accounts, don’t fall off for seven years.Make sure the lease term doesn’t end before this negative information falls off. , The amount is typically higher than the market rate.
This excess amount is called the “rent premium,” and it accumulates while you rent.
If you decide to buy the house, then your rent premium is applied to the purchase price.For example, market rent might be $1,000.
However, you’ll pay $1,250 a month.
If the extra $250 accumulates for three years, you’ll have $9,000 to apply to the purchase price.
If you don’t go ahead and buy the house, you typically lose this rent premium. , As the renter, you shouldn’t be responsible for all maintenance.
However, you may need to be responsible for minor maintenance.
Be very clear in the contract as to who will take care of what.
Consider the following:
Routine maintenance, such as raking leaves and mowing the lawn.
Typically, the renter is responsible.
Major repairs, such as fixing a leaking roof or replacing a broken heater.
Usually, the home owner is responsible.
Property taxes.
Usually, the homeowner should be responsible.
Insurance.
You should have renter’s insurance, and the owner should have homeowner’s insurance. , The seller or buyer can draft the contract.
If you’re in charge, you can use a sample contract online or hire a lawyer.
At a minimum, you should have a lawyer look at the contract.
Contact your nearest bar association for a referral to a lawyer.
If the seller drafted the contract, pay particular attention to whether the agreement is a “lease option” or “lease purchase.” In a lease purchase agreement, you must buy the house when the lease period ends.
The seller can sue you if you refuse.Instead of lease purchase, get a lease option, which gives you the option of buying. , You’ll probably need a mortgage to buy the house, so check your credit history.
Get free copies of your reports from each of the three national credit reporting agencies and check them for errors.
For example, an account from an ex-spouse might be listed as yours.Contact the reporting agency that has the incorrect information and dispute it. , To qualify for a conventional mortgage, you need a score of about
640.If your score is too low, then try to raise it by aggressively paying down debts, in particular credit card debts.
You can get a copy of your credit score in one of the following ways:
Use a free website, such Credit.com.
Pay for your FICO score at www.myfico.com.
Meet with a housing counselor or a credit counselor, who can get your score.Check your online credit cards accounts or your monthly card statements. , Before your lease period ends, you need to tell the owner whether you intend to buy the house.
Check your contract to see how you must notify them.
If you’re not yet ready to purchase, you should talk to the owner about extending your lease. , A mortgage lender will analyze your finances (assets, income, and monthly debt obligations).
You must complete an application and provide documentation, such as your bank statements and proof of income.
If the lender approves you, they’ll send you a letter explaining the amount you can borrow.Seek preapproval two or three months before you intend to close on the house.
After 90 days, the approval is no longer valid. , The closing process is lengthy.
Your lender will want an appraisal, inspection, and title report.
You’ll need to review any disclosures from the seller about defects in the home.
If all goes well, you should close about 45 days after you exercise your option. -
Step 3: Hire a real estate agent.
-
Step 4: Search online.
-
Step 5: Check why the owner is selling.
-
Step 6: Run a credit check.
-
Step 7: Analyze tax records.
-
Step 8: Pay attention to red flags.
-
Step 9: Get an appraisal.
-
Step 10: Have the home inspected.
-
Step 11: Review the title report.
-
Step 12: Check if you’ll qualify for a mortgage later.
-
Step 13: Negotiate the purchase price.
-
Step 14: Pay for the option.
-
Step 15: Determine the length of your lease.
-
Step 16: Negotiate your monthly rent.
-
Step 17: Divide up maintenance responsibilities.
-
Step 18: Review your contract.
-
Step 19: Clean up your credit.
-
Step 20: Check your credit score.
-
Step 21: Exercise your option.
-
Step 22: Get pre-approved for a mortgage.
-
Step 23: Close on your new home.
Detailed Guide
Homeowners often advertise their houses as lease-to-own.
Drive around and look at signs.
Typically, the sign will state the purchase price and the monthly rent.
Check all neighborhoods you’d like to live in.
Many sellers have never thought about leasing their home to a potential buyer.
However, if the market is slow, they might consider it.
If you find a home you love, then ask the seller if they’re open to a lease-to-own arrangement.Search websites to see if a home has been on the market for more than six months.
If so, the owner might be looking to earn some money on it, so a lease-to-own arrangement might be perfect. , Agents usually know about lease-to-own listings.They also might know of properties that have been sitting on the market for a long time.
Find a real estate online or in your phone book and schedule a consultation., Websites like IRentToOwn and HousingList contain lease-to-own listings.
You’ll need to pay a subscription fee to use many of these websites.
However, it’s a good option if you can’t find anything on your own and don’t want to hire an agent., Good reasons include the owner has bought a new house and needs to rent out the current property, or they are preparing to move for a job.
When you look at the home, you can ask in an off-hand manner why they are selling.
Listen for signs the owner is in financial trouble.
For example, they might be vague, or they might insist they need to get someone in the house fast.
If the owner goes bankrupt while you’re leasing, they’ll probably lose the house and you’ll also be evicted at the same time.
For this reason, you’ll want a seller who is financially stable., Ask the owner’s permission.
They might protest, but explain your concerns and refuse to go ahead until you run a check.
You can contact Experian, Equifax, or TransUnion to run the check.Look for a large debt load, such as maxed-out credit cards or accounts in collections.
These are signs of financial distress. , You can get property tax records from the county tax assessor’s office.
Make sure the person you’ve been working with is actually the owner.
Sometimes, fraudsters will pretend to own a home they’ve never even lived in! You can also check whether any tax liens have been placed on the property.Tax liens are huge red flags, so if you find any then walk away.
Look for other liens too, such as mechanic’s liens or liens placed on the property by someone who won a lawsuit against the owner. , Many fraudsters are looking for a gullible buyer, so you need to protect yourself.
Look out for the following signs that a lease-to-own arrangement is shady:
The seller wants to charge below-market rent.
The seller doesn’t want to check your credit history.
You’re charged an application fee.
You can’t understand the lease and the seller doesn’t want to answer your questions. , You want to know how much the house is worth, in case you agree to buy it at the end of the lease period.Obtain a referral to an appraiser from your real estate agent.
You can also search the directory of the American Society of Appraisers.
Costs vary, depending on your location and the size of the home.
Get a quote before hiring the appraiser., Uncover serious (or minor) defects in the home now.
It would be a shame to rent for two years and then find out the house has a major structural defect.
Your real estate agent can recommend an inspector, who will probably charge $300-600 for an inspection., A title report will tell you how long the seller has owned the house.
Ideally, the seller will have lived in the home for several years.
Someone who’s owned the house for a long time should have equity built up in the home and are probably more stable.Contact a title insurance company to get a copy of the title report. , You don’t need a mortgage now, while you are renting.
However, you’ll need one later, if you choose to buy the house at the end of the lease period.
Make sure your credit isn’t so bad you won’t qualify.A mortgage broker can review your credit history and predict whether you’ll qualify for a mortgage in a couple years.
They also might have tips for improving your credit in the interim. , Your contract will need to identify how much you will pay if you choose to buy the house after the lease period.
Generally, there’s two ways you can set the price:
You can put the price in your agreement.
Typically, you’ll set the price a little higher than the home’s appraised value to account for the increase in home prices.
This is risky.
The housing market might crash by the time you get ready to buy the home, but you still have to pay the amount in the contract.Alternately, you might decide to fix a price when the lease ends.
For example, you can have a second appraisal done at that time. , The option gives you the exclusive right to buy the home during the option period.
You’ll need to pay for this privilege, typically 3% of the purchase price.
For example, if the purchase price is $150,000, then you’ll probably pay around $4,500.Typically, the option amount is set off against the purchase price.
However, if you ultimately decline to buy the house, then you’ll lose the option payment., Lease-to-own contracts typically last from two to five years.However, it should last as long as necessary for you to improve your credit history so that you can get a mortgage if you choose to buy.
Look at your credit history.
Some negative information, such as collection accounts, don’t fall off for seven years.Make sure the lease term doesn’t end before this negative information falls off. , The amount is typically higher than the market rate.
This excess amount is called the “rent premium,” and it accumulates while you rent.
If you decide to buy the house, then your rent premium is applied to the purchase price.For example, market rent might be $1,000.
However, you’ll pay $1,250 a month.
If the extra $250 accumulates for three years, you’ll have $9,000 to apply to the purchase price.
If you don’t go ahead and buy the house, you typically lose this rent premium. , As the renter, you shouldn’t be responsible for all maintenance.
However, you may need to be responsible for minor maintenance.
Be very clear in the contract as to who will take care of what.
Consider the following:
Routine maintenance, such as raking leaves and mowing the lawn.
Typically, the renter is responsible.
Major repairs, such as fixing a leaking roof or replacing a broken heater.
Usually, the home owner is responsible.
Property taxes.
Usually, the homeowner should be responsible.
Insurance.
You should have renter’s insurance, and the owner should have homeowner’s insurance. , The seller or buyer can draft the contract.
If you’re in charge, you can use a sample contract online or hire a lawyer.
At a minimum, you should have a lawyer look at the contract.
Contact your nearest bar association for a referral to a lawyer.
If the seller drafted the contract, pay particular attention to whether the agreement is a “lease option” or “lease purchase.” In a lease purchase agreement, you must buy the house when the lease period ends.
The seller can sue you if you refuse.Instead of lease purchase, get a lease option, which gives you the option of buying. , You’ll probably need a mortgage to buy the house, so check your credit history.
Get free copies of your reports from each of the three national credit reporting agencies and check them for errors.
For example, an account from an ex-spouse might be listed as yours.Contact the reporting agency that has the incorrect information and dispute it. , To qualify for a conventional mortgage, you need a score of about
640.If your score is too low, then try to raise it by aggressively paying down debts, in particular credit card debts.
You can get a copy of your credit score in one of the following ways:
Use a free website, such Credit.com.
Pay for your FICO score at www.myfico.com.
Meet with a housing counselor or a credit counselor, who can get your score.Check your online credit cards accounts or your monthly card statements. , Before your lease period ends, you need to tell the owner whether you intend to buy the house.
Check your contract to see how you must notify them.
If you’re not yet ready to purchase, you should talk to the owner about extending your lease. , A mortgage lender will analyze your finances (assets, income, and monthly debt obligations).
You must complete an application and provide documentation, such as your bank statements and proof of income.
If the lender approves you, they’ll send you a letter explaining the amount you can borrow.Seek preapproval two or three months before you intend to close on the house.
After 90 days, the approval is no longer valid. , The closing process is lengthy.
Your lender will want an appraisal, inspection, and title report.
You’ll need to review any disclosures from the seller about defects in the home.
If all goes well, you should close about 45 days after you exercise your option.
About the Author
Deborah Davis
Dedicated to helping readers learn new skills in practical skills and beyond.
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