Today’s housing market in Virginia Beach, Norfolk and Chesapeake is tougher than ever, yet the American dream of home ownership is still very much alive. Many want to own, but circumstances prevent home ownership from happening. The list varies from from credit issues to job security to financial setbacks and many more reasons. But there are non-traditional paths to home ownership, as well. For some, that key is to learn how to buy a house using a lease option.
You’ve probably heard lease options are scams and no one ever buys the house anyway, or there was no security for the future in utilizing this method. Many confuse “rent to own” with “lease option” when they are not exactly the same. To help clear the waters on this potential home ownership option, we’re going to give you a step by step guide, along with some insider’s secrets, on how to buy a house using a lease option.
Before you get into the finer points of making a contract and setting the ball in motion with a lease option, you should stop and ask yourself three questions:
- Will you qualify for a mortgage later? Consider how much is really going to change in the next few years. Most lease options are short-term 6 month to 24 month contracts. If you can’t qualify for a mortgage now, are you sure you can qualify for one when your contract expires?
- Is the cost worth it? The option fees included in your monthly payment generally compensate the owner for taking the house off the market. These fees fall anywhere between 3% and 5% of the total purchase price, and if you decide not to purchase the house at the end of the contract, you will not get these fees back. Additionally, these fees raise the rent, making your payments higher than normal.
- Are there traps in the fine print? We all know the fine print always gets us. When you choose this option, you don’t have the same protection that a regular home sale provides. It is important to hire an experienced real estate agent to help you understand everything in your contract before you sign. Your agent can and should conduct a title search to make sure there are no liens on the property and raise awareness of anything the seller may add to the contract that allows him to seize the property and for what reasons.
Please note there is a difference between a lease option and a lease purchase. The biggest differences are that in a lease purchase, the buyer agrees to get a loan and pay off the remaining balance on the house once the contract has expired; to be responsible for all upkeep on the house including taxes, insurance, and maintenance; and they must buy the house. With the lease option, there is no penalty or expectation to buy the house at the end of the contract. Be sure you understand which type of lease is offered before proceeding.
Now that you’ve done your research, found your forever home, and convinced the seller to do a lease option, there are 8 steps you should implement to get the best out of the lease and the most out of your money.
- Do a home inspection. Hire a professional to inspect the house and alert you to any issues the house may have. While most states, including Virginia, require a seller to give full disclosure, an independent house inspection is still important. If the inspectors find any problems, you want to make sure they won’t cause issue in acquiring a loan later, and you may want to specify who is responsible for the repairs in the contract. Additional repairs could also drop the price of the house down to compensate for the buyer covering the repairs, so it could prove beneficial to know the true condition of your desired home.
- Negotiate. Nothing is set in stone. Don’t be afraid to haggle and get the terms that suit you best. After all, you’re the one making the payments. You help decide the final sale price, how long you want to pay the lease, how much the option fees are, and even how much of your lease payment is applied to the final sale price each month. You can find lease contracts online, but hire a local real estate agent or lawyer to do this for you instead, since the laws of these contracts vary from state to state, and they help draw up the contract and negotiate effectively.
- Pay an option fee and sign the contract. The option fee is an upfront, usually non-refundable payment that makes the contract binding. This is not a security deposit, you won’t get it back at the end of the agreement. Make sure you’ve dotted all your t’s and crossed all your i’s before handing over that payment and sign the contract.
- Check into insurance. You now have an interest in the home, so you may want to consider finding appropriate insurance to recover any losses you experience and cover your increased liability exposure.
- Make your monthly payments on time. Remember, a portion of these payments go towards the option fee, while the rest may go to the purchase price, should you choose to follow through with the sale when the contract ends.
- Make improvements. If the house inspection turned up some minor repairs, or if some cosmetic changes improve the value, it is in your best interest to take care of these things. By improving the value of your home during your lease, you earn “equity” because the final price remains the same. Increased equity could help you secure a better loan. Larger equity means an increased down payment.
- Apply for a loan. Don’t wait until the last minute. Plan ahead and apply for a mortgage loan a few months before your agreement ends. The lease option may allow you to “refinance,” offering a cheaper and quicker way to process the loan. In any case, it is essential to have a mortgage in place by the time the contract ends.
- Close on the home. This is the final step. You’ve made all the right moves, you’ve secured the mortgage. Congratulations, you are now a homeowner.
We would be remiss if we did not include a few insider secrets. Make sure you keep accurate records of your payments and expenditures. You will need record of these to secure your loan, especially if you intend to refinance, and it also protects you from any unsavory sellers who try to take advantage of you.
When you decide how long your lease should be, consider why you need a lease option in the first place. The longer the arrangement, the more money and higher costs you pay because of those option fees. You also want to consider the economy. Is the house in a neighborhood with a home owners association (HOA)? Will this particular area decline in value? Take these into consideration. An HOA generally protects home value, offering the option for a longer lease agreement, whereas you may want a shorter option if the value could decline.
Keep in mind that the buyer has no obligation to purchase the property at the end of the lease option, but the seller must sell the property if the buyer is interested.
Have any questions about buying a house using a lease option in Virginia Beach, Norfolk or Chesapeake, VA? Want to talk over the pros and cons of a lease purchase? Need help figuring out what your best route to home ownership is? Contact us today. We are ready and able to help you.