A lease option gives you the right to lease the property for your use and gives you the option to buy it as well, at a predetermined price. You may be required to pay an amount for the option, totally negotiable, and a part of every month's lease payment will go toward the down payment on the house. An example of how the above would be: leasing a house for $1750 a month, locking in a purchase price of $310,000, paying $2500 for the option and getting $250 a month credit toward the down payment. You would have three years to exercise the option. If you waited the entire 3 years and then exercised the option, the results would be:
Sales price: $310,000
Less:
Option Money: 2,500
Credited money (lease): 9,000
Balance Owing: $298,500
What is the magic behind a lease option? It gives you ownership qualities for the cost of a lease. This means you are able to stay in control of a property whether you are leasing it or you assign the lease to another.
You can reap the benefits of ownership, without really owning it, by exercising the option at any time and closing the sale, or by putting the house up for sale and selling it to a third party. You then own the profit between the option price and the amount you sold it for. You can lease as many properties you want as long as you can afford the payments, or assign the leases to someone else and hold on to the options which entitled you to the value achieved during the period of time you have them. (Writers note: a lease option doesn't create value. Only the upward price movement in real estate and the paying down of the loan creates value.)
If you are familiar with the stock market and its jargon, we are talking about buying a "call." The main differences are that it is on real estate and contains a lease of the real estate during the time of the option.
It is important to note that just the same as a call in the stock market, you can lose and your option money will be gone. But unlike real estate, your loss is always limited only to the option money you put up.
When applying for a mortgage loan, you have to realize that if you had to give a deed in lieu, your credit will have been damaged, so I am going to tell you what that means. It will take 24 months before you can do an FHA loan and the same time on a Fannie Mae or Freddie Mac loan if the underwriter can appreciate the need for your previous actions. As time passes, it should get easier to reestablish your credit.
Caveat: Not everyone is built for, or is interested in, the risk reward equation. It is true that you can win the lottery and that the extraordinarily large reward is never commensurate with the risk, but your chances of that happening coincide with Barbara Boxer retiring from the Senate and writing the Dear Abby column. Those who are prepared to take a risk to realize the reward which is the benefit side of the equation, have probably never found a better time to get into the real estate market. There is money to be made and in some cases better lifestyles to be had. It's your move.