We previously discussed the lease with option to purchase as an alternative to a traditional way to purchase real estate. In this brief article we will go over a few advantages and disadvantages to the parties of entering into such a transaction.
Advantages and Disadvantages to Buyers
One major advantage to a buyer entering into a lease with option to purchase, is that if a buyer is short on funds and/or unable to qualify for a mortgage, this gives the buyer time to save for a down payment or improve their credit score. Another advantage to the buyer is the ability to lock in a purchase price in a market with increasing home prices. Additionally, if a buyer is relocating and waiting to sell a property to fund the purchase of the new home, a lease with option to purchase can allow the buyer to take possession of the new home until they are able to purchase it. It is also an opportunity to test out the new neighborhood before committing to the purchase.
A disadvantage to the buyer is that if the buyer is unable to improve a credit rating or gather the cash expected within the option period, he or she will lose their option payment and potentially have to move from the house they have settled into. Furthermore, locking in a purchase price can back fire if the market declines.
Advantages and Disadvantages to Sellers
Giving potential buyers the choice of a lease with option to purchase could be a good strategy in a competitive selling market as it opens the field to more potential buyers. If the sale falls through, the seller keeps the nonrefundable option fee and earned rent over the lease term. Unlike standard rentals, a lease with option to purchase tenant is more likely to maintain the condition of the property since their intention is to eventually own it.
A disadvantage to the seller is the risk that the property will depreciate, and that the potential buyer will not exercise the option to purchase. This would result in having to eventually sell the property for less than what would have been realized had the seller went with a straight purchase instead of entering into the option to purchase agreement. Another disadvantage is the seller’s uncertainty of whether the potential buyer will exercise the option to complete the sale. Throughout the lease and option period, the seller knows that there is a possibility he or she might have to go through the whole process of selling the property again.
