Prepare for the Perils
Of Lease-Option Deals
Question: My family recently moved from an area where the housing market is struggling, so we haven't been able to sell our house. Our broker has located a buyer, but his credit isn't that great, so he would like to enter into an agreement that would allow him to rent with the option to buy. If his credit report is acceptable and the down payment is sufficient, should we go forward with the deal? Are there any pitfalls we might be overlooking?
-- Diane, Phoenix
Diane: It sounds like your broker is suggesting is a "lease-option" transaction, where you lease the property to a tenant for a period of time and give this person the option to buy by the end of the term. These agreements typically are used when the tenant wants to buy, but doesn't have the cash for a down payment. A portion of each month's rent is set aside to be used as the deposit. When there's enough money -- perhaps after two or three years -- you credit the tenant with the down payment he or she gets a mortgage, and the sale is made.
Lease-option deals are made most frequently in bad real-estate markets where solid buyers are hard to find. Many times they are successful, but it's important to remember that the option to purchase is the tenant's. He or she can choose to leave at the end of the lease term. For that reason, be sure to get a hefty cleaning/security deposit to protect your interests.
Mr. Irwin has more than 25 years' experience as a Los Angeles-area real-estate broker. He is the author of more than two dozen books about real estate and is recognized as one of the most knowledgeable writers in the real-estate field. Mr. Irwin's most recent book is "Tips and Traps When Renovating Your Home," (McGraw-Hill, 2000).
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