Lease with Option to Purchase
Here in Park City, Utah a Lease with an Option to Purchase was a seldom used real estate document until recently. While the Park City real estate market was hot, and financing options were loose and easy, the use of a Lease with Purchase Option was nearly non-existent. Sellers had very little motivation to rent their home and wait to see if that renter would later buy the property. Furthermore, Buyers could so easily qualify for loans that it made little sense to rent when most likely the property would cost more months later. Changes in the housing and credit markets across the country can be seen here in Park City too. Under the right circumstances this contract is becoming a popular tool for Buyers and Sellers of Park City area homes and condominiums. Thoroughly understanding how a Lease with Option to Purchase works is critical to implementing this contract successfully.
The best way to think of the Lease with Option to Purchase real estate contract is to separate it into two pieces, which include a purchase option and a lease. The purchase option portion states that the Buyer has the right to purchase the home or condominium at a set price on or before an agreed upon date. The Seller does not have the right to change the price or sell the property to anyone else. The Buyer is not obligated to purchase the property, but the price they paid for the option is non-refundable. Think of the option as earnest money or a down payment. The second portion of the contract is a fairly standard lease with a few minor changes. There may be a portion of the rent paid that is applicable toward the purchase price. Again, this portion is non-refundable if the Buyer does not complete the purchase. In addition, the lease may be terminated by completing the purchase before the stated end of the lease.
There are pros and cons for both the Buyer and Seller in a Lease with Option to Purchase contract. On the Seller's side there are the following considerations; a) not having truly sold the home; b) the negatives of being a landlord while waiting for the Buyer to exercise the option; and c) wondering if the Buyer will be able to complete the purchase. The positive side for the Seller is that they have collected a sum of money for the option. In addition, the Seller is collecting rent so the property may have a positive cash flow while they wait. For the Buyer, a Lease with Purchase Option may offer the following; a) give them time to sell a home in another town; b) improve their credit scores; or c) act upon a strong value price all while living in the home they hope to purchase. The risks for the Buyer lie in forfeiting their Option money if they change their mind or if they can not complete the purchase by the agreed upon date.
The Buyer and Seller can be affected by the changing market if the value of the home changes before the sale is complete. If the home increases in value, the Seller may think that they were forced to sell at a price lower than the property's value. If the home decreases in value, the Buyer may be forced to purchase the property at an inflated value or lose their Option money. A real possibility is that the Buyer may not be able to secure a loan if the home does not appraise for the agreed upon price.
While both sides of a Lease with Option to Purchase contract are exposed to some risk, this contract can offer a good strategy for bringing a Buyer and Seller together in a complicated market. The YouInParkCity.com Group has successfully completed this type of sales contract in the Park City area.
For more information and help in determining if using a Lease with Option to Purchase may be a viable option for you, please contact your YouInParkCity.com Group Keller Williams Park City Real Estate Agent. We welcome the opportunity to assist you with the sale or purchase of a home or condominium in the Park City or Deer Valley area.