Lease With Option To Buy-Advantages and Disadvantages

A lease with option to buy is typically for people who want to buy a home but cannot meet the traditional guidelines set forth by banks and other lending institutions. If you recently filed for bankruptcy, foreclosed on your last home, sold your last home through a short sale, have bad credit, or have too much debt then you may want to consider a lease with option to buy.

This article assumes you know what a lease with option to buy is. If not you may want to read "Lease Option To Buy – What Exactly Does This Mean?"

Before you decide that a lease with option to buy is right for you it's important to know the advantages and disadvantages from the consumer point of view.

AVANTAGES OF A LEASE WITH OPTION TO BUY

The number one advantage is the ability to secure a home today with bad credit, recent bankruptcy, foreclosure, etc., while working to improve your financial situation over the next year or two when you'll be able to qualify for regular financing. Since home sellers do not have to follow the same qualifying guidelines that lending institutions must follow they can make their own decisions and this usually benefits the buyer.

A second advantage is you have a higher chance of negotiating better terms because you're dealing with a human being, not a bank. As a general rule landlords and home sellers make more decisions based on emotion as compared to a lending institution. When things look bad on paper there's always the ability to talk your way into a more favorable position.

The third advantage is you are not obligated to purchase the home after the lease period ends. This is especially advantageous in a declining market. After all, what could be worse than having to purchase a home when its value is substantially lower than what you're paying?

By far, though, the biggest advantage is securing a home when the bank won't give you money. On the flip side, though, there are definitely some disadvantages to a lease with option to buy

DISADVANTAGES OF A LEASE WITH OPTION TO BUY

There are two disadvantages associated with a lease with option to buy. First is the financial risk. When a decision is made not to exercise the option to buy, the down payment (or security deposit) is forfeited along with any portion of the lease amount that was set aside for the option.

In the following example, the buyer decided against the option and did not purchase the property. In total, the buyer 'gave' $7,800 to the seller.

Term of Lease: 24 months
Total Monthly Lease $2,000 ($1,800 for the lease and $200 for the purchase option)
Security Deposit/Down payment/Escrow Money: $3,000

Two hundred dollars a month for 24 months is $4,800. Add this to the security deposit for a total of $7,800. Forfeiting this kind of money is a huge disadvantage.

The other disadvantage is the lack of inventory available to the buyer. Most people who are looking to sell do not want to get involved in lease with option to purchase agreements as they need to sell in order to purchase their next home.

Overall, it's not unusual to find a buyer who looked at over 100 homes before they found a seller who was willing to do a lease option. The good news is there are plenty of sites on the Internet who specialize in this niche market. A little research and persistence pays off.

In summary, a lease with option to purchase agreement allows certain buyers the advantage of a second chance at home ownership, negotiating better terms through emotion and not being obligated to carry through with the purchase. The disadvantages are financial risk and lack of inventory.