Reasons For Using A Lease Option
Buyers
1. Buyer is relocating and may need to sell a property in another area before the buyer can qualify to purchase the new home.
2. Buyer may have had some credit issues that can be resolved during the option period.
3. Buyer may have started a new business and otherwise qualifies and can afford the payments.
4. Buyer may not have enough funds for a downpayment.
5. Buyer is relocating and is unfamiliar with the new area. He/she wants to "get a feel" for the area--safety, school quality, convenience, etc.
In the event of non-payment, it may be possible for the seller to remove the tenants through eviction, which is likely to be cheaper than foreclosure on a mortgaged property. The lease-option may also require less money up front, while a mortgage might require a substantial down payment from the tenant.
If the tenant does not exercise the option to purchase the property by the end of the lease, then generally any up front option money along with any monies that the tenant paid in addition to the market rental rate for this option may be retained by the owner depending on the agreement. This might occur if the tenant no longer wishes to purchase the property, or if the tenant wishes to purchase the property but is unable to obtain the financing required to do so.
Seller
A lease-option allow the seller to sell a property that they may not have otherwise been able to sell. In many cases a seller can net more money when offering terms to a buyer. Sellers can often avoid paying a Realtor fee by using a lease-option agreement (as they have already found the buyer themselves).
There is an expression, “Price or terms, pick one;” sellers may be able to sell for a better price (or sell the property period) by offering attractive terms to the buyer(s). For the buyer to get a favorable price the terms usually have to favor the seller.
If the buyer defaults and the contracts are drafted properly then there is an automatic tenant landlord relationship. All valuable considerations are typically surrendered and then it would be an eviction.
Some forms of lease-option agreements have been criticized as predatory. For example, sometimes lease-options are offered to tenants who cannot realistically expect to ever exercise the option to purchase. Sometimes the lease-option period is for such a brief amount of time (6 months, for example) that the tenant-buyer has little chance to repair his/her credit, save money for a down payment, or address whatever other problems exist.
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