Lease Option to Buy Snag

From a Sellers perspective the Lease Option could be viewed as a viable method of moving the property from the negative side of the equation to the positive  side.  If a home is on the market it obviously has no rental income, it's also not benefiting the present owners by providing a roof over their heads.  As it sits on the market it's costing the seller each and every day.  They probably have to wait to make an offer on their new home until they have an offer on their present home.  One of the latest tactics when a home doesn't sell is to Lease Option it.  I wrote about one such instance here:

Your Listing Hasn't Sold? Lease Option It!

This tactic could be a win for the Seller depending on the structure of the deal.  Many deals are structured to favor the Seller, not the Buyer.  Not that there couldn't be a Win - Win for both, I just happen to see more tilted towards the Seller.  That makes some sense as they are the ones writing the contract. 

For the potential Buyer, there are certainly risks involved. 

Lease Options are nothing new.  Rent to Own business models are known to all.  I could go down to my local Rent - A - Center and pick up a new leather couch.  Exorbitant rental fees aside, I now am watching my Rent to Own Plasma, while sitting on my Rent to Own couch.  If I miss my weekly payment, they come pick up my TV and couch and I'm back to where I started.  If I continue my payments to the end, I now own the couch and TV.  It's all good.

Lease Option the house and I will probably put something down as a deposit, I'll have to make my monthly rent on time each and every month, and then 2 years later a portion, or maybe all of my rent is applied towards the purchase price.   It's all good.

Almost.

• What happens if the market zooms in those 2 years?
• What if it declines?
• What will rates be like in June 2008?
• Will his credit be any better then?
• What will underwriting guidelines be like in June 2008?
• Will he be able to qualify for anything at all?

These are just the reasonable questions we can ask.  The foreseeable ones.

But remember, there's a reason the house wasn't sold to begin with.  Was it overpriced?  Was it below standards?   Did the owners need money?  There was a reason.

This presents another risk to the Lease Option Buyer.  What if the Owner / Seller goes under?  What happens if the home goes into foreclosure?  When you signed the agreement, did you ask for financial statements from the Seller?  Did you check to see if there were any liens on the property?  Of course not.

Lease Options can be good vehicles to move property.  But increasingly there are more and more reports coming out as good Lease Options go bad.

Here's a couple I've been following:

 Crisp & Cole lease to buy program

http://www.buzzle.com/editorials/12-2-2005-82927.asp

http://sfvblog.com/tag/investor-info/lease-option/

"If you lease option the house, you can charge up to 25% more than the current market rental price, because you are offering to let the tenants buy the house. You might also be able to use the option consideration to pay for the payments to the bank of which you are behind."

How scary is that?