Renting with
an option to buy gives the tenant leasing the home the right to buy it later.
Renting with an option to buy is a method of creative financing that legally grants the renter of a house an option to buy the property at a future date. For would-be home buyers who do not have the money or credit to obtain a traditional mortgage, renting with an option to buy can be a way to have the freedom of renting while enjoying rights of ownership.
Option Clause
Renting with an option to buy involves the renter and the landlord signing a lease that looks very similar to a normal rental agreement with one major exception--the option clause. This clause gives the renter of the house the right to purchase the home after an agreed-upon period of time has expired by serving the owner with a written notice of his intent to exercise the option to buy. The renter pays a premium for this option, which is often nonrefundable if the option to buy is not exercised.
First Right of Refusal
While renting with an option to buy, there is a chance the landlord could decide to sell the house right out from under the renters. To prevent this, there is usually a clause in the contract that gives the renter the first right of refusal. That means if it becomes necessary for the landlord to sell the house before the renter exercises her option to buy, he must first offer it to the renters. If the renter does not exercise the option, the landlord can sell it to another buyer.
Advantages
Renting with an option to buy does not require the buyer to endure an extensive check of his credit and finances. Nor does the buyer have to come up with a significant lump sum for a down payment. The seller usually gets her asking price without a lot of haggling from the buyer. and the seller gets a commitment from someone who wants to buy the house or, at the very least, will pay steady rent while deciding if and when to exercise the option.
Disadvantages
While some of the money paid to the landlord is often used as a credit towards the down payment on the house, the greater portion of the monthly payment will be nonrefundable rent that is not applied toward the home purchase. This can make renting with an option to buy a more expensive alternative for purchasing a home depending on the length of the rental period.
Popular During Housing-Market Slumps
Renting with an option to buy becomes a more popular alternative when fewer borrowers qualify for mortgages offered by banks and other financial institutions. It can be a way for people who want to own a particular home to start building equity towards a down payment on the property, while also working to improve their credit.
