Q: What is a lease-option?
A: By definition a lease-option basically means that you are renting at the moment, but in the future you are planning to buy the house. The price of the house is set in stone by a contract signed by both the renter and owner. Typically, the owner receives an upfront sort of “down payment” to provide the lease-option as part of the renter’s contract.
Most renters take the lease-option to an attorney to have this reviewed before signing.
Advantage: During a good economy, the renter usually benefits from locking in a price for two to five years. How? If the home price goes up 5 to 10 percent, your equity is 5 to 10 percent above the contract price.
Disadvantage: The renter has to put up some sort of down payment money in order to have this lease-option added to a rental contract. The lease-option is usually not refundable unless the contract specifically provides for situations where the owner will consider a refund. In a bad economy, such as the one we have had in the last five years, most renters did not exercise the right to buy the rental property at the agreed upon price. Why? Home prices dropped 10 to 50 percent or more. In northern Nevada, renters could not exercise the right to buy because they lost their employment and could not afford to buy or qualify for financing; or the renter had to relocate to another state to find work. In the event that the renter does not want to exercise the right to buy the property, he or she will forfeit the down payment money and more. For most renters, this is a lose-lose situation.
Q: Is lease-option right for this south Reno couple?
A: This renter put up $18,000 to rent a lovely south Reno house in 2006 over three years. This renter locked in the price of $450,000 during the real estate peak. This renter thought the house was a good steal in 2006. They are projecting their rental house will appraise for more than $450,000 in three years when they can exercise their option to buy the house. Any appraised value above $450,000 will be their equity. In 2008, one of the renters lost his job and was barely able to keep making the monthly rental payment. In 2009, when it came time for the renter to exercise the option to buy the property … you guessed it, the rental house appraised for $250,000 — it had lost $200,000 in value. Wait a minute here, the owner and renter set the $450,000 price in stone by signing a contract, right? Yes. This renter lost the $18,000 they put up, right? Yes.
Q: Did this renter lose anything else?
A: This renter also lost improvement money they invested in a house they did not own. Why? The contract did not provide that the renter would be reimbursed for unauthorized improvements.
Q: For whom is a lease option a benefit?
A: Good question. A renter should really think twice before putting out a non-refundable “down payment” for a lease-option rental contract. Most lease-options benefit the owner. The owner will have a renter who is committed to a lease of three to five years. The owner will have a renter who will put up a non-refundable down payment for this lease-option of the rental contract. The owner will have a renter who will maintain the property and even improve a property the renter does not own. The lease option is a win-win for the owner.
Annie Christian is a real estate broker and owner of The Annie Christian Real Estate Group. She helps with everything from buying and selling to foreclosure and short sale. To submit a question, call 351-5117. Her website is www.anniechristian.com.