Saturday, January 31, 2015
FAIRFIELD-SUISUN, CALIFORNIA
99 CENTS

Considering a lease/option versus a purchase

By
From page HMS2 | March 15, 2014 |

Q: What is better? Rent-to-own or purchasing a home without rent-to-own? My best friend says you can get into rent-to-own with 1 percent down, but is it more beneficial for a person that is trying to restore their credit?

A:  That’s a very timely question.

Historically, rent-to-own was pretty much confined to purchasing cheap furniture and televisions.

Recently I’ve seen more advertisements where investors are offering such an arrangement for potential homebuyers. The concept is as old as real estate itself and has always been common in commercial properties where buyers tend to be more legally sophisticated, or who commonly have contracts reviewed by attorneys.

In the residential world, this type of transaction carries the potential for danger and abuse.

You can call it “rent to own,” or anything else you like, but let’s see this for what it really is.

There are an infinite number of variations to what is really known as a lease/option agreement, which is what we’re talking about. The general idea is a tenant signs a lease that carries with it an obligation that the landlord sell the property to the tenant at a future time, if the tenant so chooses.

The lease part is obvious. It’s simply a landlord and tenant relationship.

The “option” portion is called that because it gives the tenant the option to exercise the purchase contract at a future date.

In a commercial context, such an arrangement could be of value to the tenant who doesn’t know if their business is going to be successful. They want a few years to run the business from that location and, if everything works out, they can buy it. If not, their lease expires and they walk away.

Or, the tenant could be playing the market, much like a stock option. If property values go up, they’ll exercise their option and buy for a below-market price. If prices go down, they’ll walk away.

With a home the dynamic is usually different.

The tenant and prospective homebuyer dreams of buying a house but either their credit or income, or both, don’t allow them to get a mortgage right now. But they see that changing in the future. Maybe they’re afraid home prices will rise and by the time they can get a loan they’ll be priced out of the market.

In the commercial world, the tenant generally pays a significant amount of cash, above and beyond the rent, to the owner to hold the option. It’s called option consideration.

Typically, though not necessarily, if the tenant ultimately exercises their option the money they paid goes toward the purchase price. If not, the owner keeps it as his compensation for tying up ownership for several years.

Most residential lease/options involve tenants without a lot of cash. So the common variation is the tenant agrees to pay above-market rent with the extra monthly amount being credited toward the purchase if the tenant exercises their option. If not, the landlord/owner keeps it.

It may be that your friend’s “1 percent” number is really option consideration they’d expect you to pay to the owner for your option.

From a financing perspective, the mortgage company is going to expect you to pay the same down payment that everyone else whose getting one of their loans has to pay. So if you need 10 percent down to get the loan, you’re still going to have to come up with the other nine percent.

From my experience, most tenants who are sure they’ll be able to get a loan in the next two years fail to do so.

I’m not trying to be pessimistic here, just real.

If you start out with no savings, and a majority of your income goes to paying the rent, how will you have the $20,000 or more you’ll need to get a home mortgage in two years? If you lost a house last year to a foreclosure and your credit score is in the 500s, how will you get it up into the mid-700s in two years?

That’s not to say it couldn’t happen. It’s only to point out that someone entering into a lease/option should think long and hard about it.

Failure to be able to exercise your option before it expires would likely mean you’ll lose either the cash you paid up front or all of the added rent you paid over the years.

Tim Jones is a real estate attorney in Fairfield.  If you have any real estate questions you would like to have answered in this column you can contact him at [email protected]

 

LEAVE A COMMENT

Discussion | No comments

The Daily Republic does not necessarily condone the comments here, nor does it review every post. Read our full policy

.

Solano News

 
SPCA begins caring for more than 100 rescued dogs

By Kevin W. Green | From Page: A1, 4 Comments | Gallery

 
Solano County confirms 1st local case of measles

By Staff and wire reports | From Page: A1, 3 Comments

 
Top workers, top students – and succulent crab

By Susan Hiland | From Page: A2

Armijo students savor catered Fuddruckers lunch

By Susan Hiland And Susan Winlow | From Page: A3 | Gallery

 
Partial Fairfield freeway road closure starts Monday

By Ryan McCarthy | From Page: A3

 
DUI patrols set for Super Bowl Sunday

By Ryan McCarthy | From Page: A3

Fairfield police log: Jan. 29, 2015

By Susan Hiland | From Page: A9

 
Suisun City police log: Jan. 29, 2015

By Susan Hiland | From Page: A9

 
.

US / World

Man charged in California family’s deaths will be own lawyer

By The Associated Press | From Page: A3

 
Stanford University to get $50 million to produce vaccines

By The Associated Press | From Page: A3

Yosemite park fee hikes coming in March

By The Associated Press | From Page: A4

 
PG&E releases thousands of emails with state regulators

By The Associated Press | From Page: A4

San Francisco coroner says human remains are from 1 man

By The Associated Press | From Page: A4

 
Judge expresses doubt about constitutionality of no-fly list

By The Associated Press | From Page: A5

French fracture laid bare as 8-year-old praises terrorists

By The Associated Press | From Page: A5

 
US mulls Middle East-North Africa category for 2020 Census

By The Associated Press | From Page: A5

 
Balloon crew makes history crossing Pacific Ocean

By The Associated Press | From Page: A5

Murder trial begins 35 years after 6-year-old vanished in NY

By The Associated Press | From Page: A5

 
Judge: Funeral home wrongly sold Lee Harvey Oswald’s casket

By The Associated Press | From Page: A5

Jordan awaits proof hostage is alive after swap deadline

By The Associated Press | From Page: A5

 
 
.

Opinion

 
GOP should plan for post-Obamacare world

By Ramesh Ponnuru | From Page: A8, 5 Comments

Editorial Cartoon: Jan. 31, 2015

By Daily Republic Syndicated Content | From Page: A8

 
Solano College news makes me sick

By Letter to the Editor | From Page: A8, 2 Comments

.

Living

Today in History: Jan. 31, 2015

By The Associated Press | From Page: A2

 
Community Calendar: Jan. 31, 2015

By Susan Hiland | From Page: A2

Horoscopes: Jan. 31, 2015

By Holiday Mathis | From Page: B7

 
My recently widowed mother is already thinking about re-marrying

By Kathy Mitchell and Marcy Sugar | From Page: B7

Five ways 3D-printed food will change the way we eat

By The Washington Post | From Page: B10, 1 Comment

 
.

Entertainment

TVGrid

By Daily Republic Syndicated Content | From Page: B5

 
Miranda Lambert leads ACM Awards with 8 nominations

By The Associated Press | From Page: A7

Shakira gives birth to 2nd baby with Spanish football star

By The Associated Press | From Page: A7

 
List: 10 Super Bowl ads you’ll be talking about

By The Associated Press | From Page: A7

 
Rod McKuen, mega-selling poet and performer, dies at 81

By The Associated Press | From Page: A7

.

Sports

 
Mustangs ride away from Indian’s home court with 66-60 victory

By Marcus Lomtong | From Page: B1 | Gallery

 
Hayward, Utah Jazz upset Golden State Warriors 110-100

By The Associated Press | From Page: B1

LeBron returns, Love, Irving team for 44, as Cavs top Kings

By The Associated Press | From Page: B1

 
Seau, Warner, Pace first-time Hall eligibles

By The Associated Press | From Page: B2

N.H. Speedway general manager faces lewdness charge

By The Associated Press | From Page: B2

 
Judge: Jury can watch Super Bowl unless Hernandez mentioned

By The Associated Press | From Page: B2

Djokovic beats Wawrinka to reach fifth Australian Open final

By The Associated Press | From Page: B2

 
Blackhawks Hall of Famer Stan Mikita has brain disorder

By The Associated Press | From Page: B2

Kings’ Cousins to replace Kobe Bryant in All-Star game

By The Associated Press | From Page: B2

 
Ko takes lead at LPGA opener, closes in on golf history

By The Associated Press | From Page: B2

Laird leads as Tiger shoots 82 and misses the cut

By The Associated Press | From Page: B2

 
NFL’s Goodell seeks to look past ‘tough year,’ to future

By The Associated Press | From Page: B3

Carroll says decision is Sherman’s if baby arrives early

By The Associated Press | From Page: B3

 
This date in sports history for Jan. 31, 2015

By The Associated Press | From Page: B4

 
.

Business

US consumer confidence at highest level in a decade

By The Associated Press | From Page: A1

 
Companies steering clear of Super Bowl name

By The Associated Press | From Page: B5, 1 Comment

.

Obituaries

Anthony Neal Hunley

By Nancy Green | From Page: A4

 
Joe Lambert Robinson

By Nancy Green | From Page: A4

Danica Gojkovich Ryder

By Nancy Green | From Page: A4

 
Garry A. Britton

By Nancy Green | From Page: A4

Anneliese Edith (Luckner) Fraser

By Nancy Green | From Page: A4

 
.

Comics

Peanuts

By Daily Republic Syndicated Content | From Page: B6

 
B.C.

By Daily Republic Syndicated Content | From Page: B6

Dilbert

By Daily Republic Syndicated Content | From Page: B6

 
Frank and Ernest

By Daily Republic Syndicated Content | From Page: B6

Baldo

By Daily Republic Syndicated Content | From Page: B6

 
Rose is Rose

By Daily Republic Syndicated Content | From Page: B6

Baby Blues

By Daily Republic Syndicated Content | From Page: B6

 
Sally Forth

By Daily Republic Syndicated Content | From Page: B6

Get Fuzzy

By Daily Republic Syndicated Content | From Page: B6

 
Wizard of Id

By Daily Republic Syndicated Content | From Page: B6

For Better or Worse

By Daily Republic Syndicated Content | From Page: B6

 
Beetle Bailey

By Daily Republic Syndicated Content | From Page: B6

Pickles

By Daily Republic Syndicated Content | From Page: B6

 
Blondie

By Daily Republic Syndicated Content | From Page: B6

Zits

By Daily Republic Syndicated Content | From Page: B6

 
Garfield

By Daily Republic Syndicated Content | From Page: B6

Cryptoquote

By Daily Republic Syndicated Content | From Page: B7

 
Word Sleuth

By Daily Republic Syndicated Content | From Page: B7

Sudoku

By Daily Republic Syndicated Content | From Page: B7

 
Crossword

By Daily Republic Syndicated Content | From Page: B7

Bridge

By Daily Republic Syndicated Content | From Page: B7

 
.

Home Seller 1/31/2015

Quirky add-ons a common feature of celebrity homes

By The Associated Press | From Page: HSR2

Real estate transactions for Jan. 31, 2015

By Daily Republic | From Page: HSR3

5 ways to make a kitchen more germ-free

By The Associated Press | From Page: HSR3

Average US rate on 30-year mortgage rises to 3.66 percent

By The Associated Press | From Page: HSR3