Lease Option Make Timely Comeback

by Broderick Perkins DeadlineNews.Com Lease options are coming back into vogue, updated with some unique consumer-friendly provisions, just in time for a changing market. Lenders have also teamed up with Freddie Mac to offer a lease-purchase program for eligible home buyers who first lease a home and later assume the balance of the mortgage payments -- all based on the true monthly cost of the mortgage. Even private entities, including Denver-based realty property investor Simpson Property Group are offering special programs. Simpson's is a lease-option deal for participating tenants who agree to purchase a new home from participating new home builders -- without paying additional rent. For much of the past decade, widespread sellers' markets gave sellers their pick of buyers and creative financing techniques, including lease options, fell from grace. Sellers avoid lease options in hot markets because they typically come with a contractually agreed upon price. In an appreciating market, the seller could be stuck with the contractual price if prices rise by the time the buyer was ready to close a lease purchase deal. Recently, however, higher prices are making buyers balk and lease options more appealing. Lease option contracts can be a solid option for cash-poor, but income-rich buyers -- those who don't have a down payment but can afford a mortgage. How options work Options typically include a potential buyer, the lessee, who pays rent to the home owner, the lessor, who wants to sell the home. Some or all of the rent and sometimes an option fee is held to accumulate the down payment. At the end of the contract, usually six to 12 months, the lessee has the option to use the down payment toward the purchase of the home for an amount agreed upon at the onset of the contract. Considered the Pandora's box of creative financing, lease options are often a better deal for the lessor, particularly one who has already moved and left the property empty. During the contract, the lessor acquires rent as income which acts to dam up any equity drain. If the lessee opts to buy, the lessor has reached his or her goal. If the lessee does not exercise the option to buy, something that occurs as often as 80 percent of the time, experts say, the lessor gets to keep the option money and all the "rent". Also, if the buyer can't qualify for a loan at the end of the contract, he or she loses money paid into the option. In a down market, if the value falls, the buyer will have to buy at the higher, previously agreed-upon price, or again, lose the cash paid into the deal. Keeping up with lease-option payments also can be tough. A lease-option's monthly payment is generally higher than the going rents for identical rental properties because the lease option payment must cover both rent, down payment savings and maybe an option fee. New option Simpson Property Group's SAVE (Start Accruing Valuable Equity) program removes the higher rent dilemma, by allowing its renters in in some states to continue to pay the same monthly market rental rate, but earmark 20 percent of it, as accrued credit, toward the cost of a newly built home from partner builders. You don't have to purchase a home in the area where you currently live, provided you purchase a home were a participating builder offers new homes for sale. You can retain your accrued credit if you move before you are ready to buy, provided you move to another Simpson community. Like traditional lease option programs, however, if you don't use your credit to purchase an affiliated builders home you lose it. In this program, because you'll pay only market rent, rather than an extra amount, as with more conventional lease options. The program doesn't guarantee that you'll qualify for a home, that's up to your credit worthiness as established by the builder. Lender option The Freddie Mac program available through lenders in more than three dozen California cities, is more like a traditional lease option plan -- with a spin of its own. Eligible buyers who come up with 1 percent down can lease a home for 38 months and then assume the balance of the mortgage payments or decline the purchase. The lease payment will be based on the true monthly cost of the mortgage, plus an administration fee. Participating communities use municipal bonds to subsidize an additional 3 percent down and all closing costs for qualified first-time home buyers with eligible incomes. Qualified participants are not required to pay private mortgage insurance, but the additional nominal administrative fee will be tacked onto the monthly payment. The 1 percent down payment is considered a participation fee (much like a security deposit for a rental contract) which the potential home buyer will forfeit if he or she decides not to assume the mortgage at the end of 38 months. Copyright © 2005 DeadlineNews.Com -- Broderick Perkins, is executive editor of San Jose, CA-based DeadlineNews.Com, an editorial content and consulting firm. Perkins has been a consumer and real estate journalist for more than 25 years.