The real estate blog.

I saw an interesting article in the Salt Lake Tribune yesterday about the rise of lease options being used in the Valley. A lease option is a type of seller financing I think will become very popular for first time home buyers and people with bad credit who want to buy homes.

The Tribune writes -

Home sales are down in many areas locally, in great part because some buyers are having difficulty qualifying for loans under tighter lending criteria put in place after the nation’s subprime lending meltdown.

Enter the lease-option or lease-to-own agreement. Through such arrangements, a buyer with credit blemishes can sign an agreement to lease a home for a specified period of time (typically two or three years), and then gain the right to purchase the property outright. In some cases, part of the rent payment goes toward a down payment on the property.

The lease option tends to favor the seller because the buyer doesn’t actually get their name on title. Additionally, the vast majority of lease options end up not becoming purchases. Lease option buyers are subject to being scammed because they don’t understand these four critical steps to having the best exit strategy on a lease option.

1. Negotiate the final sales price up front and have it written in the lease agreement. The best way for the buyer to cash out the seller should they execute the agreement is through a refinance, not a purchase. The amount of equity between the “purchase” price and the appraised value gets calculated in the loan to value ratio. Structuring the lease option up front favors the buyer and makes it easier for the purchase to be closed.

2. Record the lease option with the County recorder. This step is reassuring for the lender and officially shows there is another party involved in the home.

Troy Sample and his former landlord are still haggling over the terms of a lease-option agreement they entered into three years ago. Sample said this summer, when his option to buy the home arrived, he couldn’t track down the property owner. “We were fully approved, but we couldn’t close,” Sample said. The property’s owner, Abraham Fox, declined to comment because Sample has taken legal action against him.

Sample said he made one crucial mistake: He failed to officially file the lease-option agreement with the county.

3. Record a Notice of Interest on the property when the lease option is recorded. This legal document will show you have an interest in the property and must be notified of and sign off any change in ownership of the property. An owner can’t sell the property to another buyer without your knowledge.

4. Have a third party record your lease payments. Lenders are really cracking down on nontraditional borrowers. It is easy to fake a payment history on lease options so have a third party do it. Some payment services will even report to the credit bureaus. A suitable alternative is to pay using cashier’s checks. A lender will question personal checks because they don’t prove the payer had the money. A cashier’s check does.

A lease option is one of several forms of “creative financing” or “seller financing” available today. Lease options have different advantages and disadvantages from other methods like “wrap around” contracts. As a buyer, make sure you plan ahead to get the best result from your lease option.