If you want to buy a home but you don’t qualify for conventional financing, a lease-to-own arrangement could allow you to realize your home-owning dreams. If you have bad credit, no credit, haven’t saved up a large down payment or want to live in an area for a while before you commit to buying there, a lease-to-own arrangement puts part of your monthly rent toward the purchase price of the home. When you’re ready to commit to the sale or are in a position to qualify for financing, you pay the balance of what you owe on the house and receive the deed. But lease-to-own arrangements aren’t without risk. Before you enter into an agreement, know what to watch out for.
When you enter into a lease-to-own agreement, you pay an option fee up front. This fee gives you the option to purchase the home at some future point. It secures your interest in your home while you build credit or save up a down payment. The option is good for a specified period of time -- one year, three years, five years or another time period you and the seller agree on. If you aren’t able to exercise your option before it expires, the seller keeps the option money and you lose it, along with any rent premium you paid toward the cost of the house. The seller may agree to renew your option, but he is not obligated to do so. Therefore, before you sign the option agreement, be reasonably sure you will be able to fulfill your obligation to buy the home by the end of the option period.
In a wrap-around arrangement, the seller uses the money you pay in rent each month to make his mortgage payment. Problems arise if the seller collects money from you but fails to pay his mortgage holder. The mortgage company can foreclose on the property and evict you. You’ll lose everything you’ve put into the house up to this point. Even if you can convince the mortgage company to sell the house to you, you’ll be starting from scratch, with no credit for your previous payments.
Some scam artists have used lease-purchase agreements to defraud potential buyers. In these swindles, the “seller” enters into a contract to sell a house he doesn’t even own. He collects monthly payments, which the buyer makes with the impression that he is building equity in the home. When the real owners of the property learn of the scam, the “seller” disappears and the owners evict the buyers. The unlucky buyer loses everything he’s put into the house up to that point.
Working with a real estate agent or real estate lawyer provides an extra layer of protection if you are interested in a lease-purchase agreement. An agent or lawyer can do a title search to make sure your seller really has an interest in the home. These professionals can also spot potential problem clauses to watch out for, such one that says if you miss even one payment you lose all your interest in the home. If you do enter into a legitimate lease-purchase agreement, be aware that you could lose your option payment and other payments if you don’t exercise the option.
Cynthia Myers is the author of numerous novels and her nonfiction work has appeared in publications ranging from "Historic Traveler" to "Texas Highways" to "Medical Practice Management." She has a degree in economics from Sam Houston State University.