Personal Finance Pros and Cons of Leasing to Buy a Home

Personal Finance Pros and Cons of Leasing to Buy a Home

pros and cons of leasing to buy a home
If you're looking to buy a home but aren't sure that you're completely ready to move forward, leasing to buy a home can be an option. In these arrangements, sometimes called a "lease option," you rent the home from the owner for an above-market rent and, in exchange for your extra payments, he gives you back a portion of it as a credit when you buy the house from him. While such an arrangement can be a path to home ownership, it can also leave you out thousands of dollars if it doesn't work out.
A Positive Step
When you sign a lease-to-buy agreement, you're making progress toward home ownership. Some people have trouble finding the discipline to set aside money every month toward a goal that may be years away. In a lease-option contract, you're making progress toward that goal "as long as the contract is written well and the landlord has to give a pre-determined portion of your payments back as a credit against the cost of the house," points out attorney Ben Brickweg. In essence, the lease-to-buy agreement is a forced savings plan, and it's easy to do, since all that it requires is that you make a larger-than-normal security deposit and write a slightly larger rent check than you otherwise would.
Time to Prepare
Leasing to own gives you the gift of time. If you need to clean up your credit or increase your income so that you can qualify for a mortgage, a rent-to-buy agreement buys you that time. Furthermore, since many lease-options also fix the purchase price for the life of the option, you don't have to worry about the house's cost going up while you're getting ready. Lease-options are also frequently structured with two- to three-year terms, as opposed to regular leases, which typically only last a year. This gives you more time in the home without having to worry about moving.
An Expensive Path
Renting to own can be very expensive. First, some landlords require you to pay 3 percent of the cost of the home as an up-front deposit, which you won't get back if you don't eventually buy the house. Second, your rent-to-own payments will be higher than regular rental payments, which may be, depending on where you live, the same or higher than a mortgage payment would be on the same property. "When you rent to buy, remember that the only thing you actually bought is an option - you don't buy the property until the end. An option is like milk - if you don't use or drink it before its expiration date, you lose everything you spent including the down payment / deposit," explains Brickweg. If you aren't able to use the option, the landlord will keep all of the extra money that you gave her as a windfall profit.
Unfavorable Terms
"Purchase-option leasing contracts aren't regular leases, so it's an especially good idea to have an attorney review them," warns Brickweg. "You could end up having your option cancelled or you could end up paying bills that you didn't expect to." A lease-option agreement could include terms that require you to pay for the insurance, property taxes or repairs that an owner or landlord would usually cover - even though you're still renting. Alternatively, the lease-option could be set up to automatically cancel if you pay your rent late, making you lose thousands of dollars of option money for sending a check in a few days late. You also take on some risk if the owner doesn't make her own payments since, according to Brickweg, "if she doesn't make her mortgage payments, she'll lose the property and you'll lose your option and what you paid for it."
Delaying the Inevitable
When you do a lease-to-buy agreement, you're putting off the inevitable. Some day, you'll have to qualify for a mortgage to be able to take advantage of your option. If you're able to improve your financial situation and qualify for a mortgage at that time, this won't be a problem. However, if something goes wrong, you could find yourself unable to qualify for a mortgage when your option comes due.
The Alternative
Brickweg tells his clients that "renting to buy is more risky when you're the tenant than when you're an owner," but there is an alternative. Instead of renting to buy, some people go the route of renting and saving. For example, instead of putting a $3,000 down payment on a lease-option for a house that would only need a $1,000 security deposit and paying $1,400 a month on a house that should rent for $1,150, they choose to rent and pay the lower price. If you then open a bank account and deposit the extra $2,000 in down payment and $250 a month in savings, after three years, you will have amassed $11,000 -- enough for a 5 percent down payment on a $220,000 house.

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