Perhaps the most important, and certainly the most complex consideration both a property owner and the prospective buyer must address before entering into a lease/purchase agreement, is what final purchase price of the property will be acceptable to both parties.
At a time when the housing market overall, was more stabilized (predictable?) one could estimate/approximate the rate of appreciation of a property fairly accurately, say two or three years ahead, dependent upon the date of closing, and arrive at a price that would comfortably profit the seller and still leave the buyer with reasonable equity.
Nowadays, we have a much different scenario. With the economy still very much in turmoil, nationwide and worldwide, and the housing market –for the most part- in a confused mess, estimating a property’s worth, even a year from now can be no more than an educated guess.
For example, who can really predict when and how the nation’s job market will improve? Will housing prices continue to fall, and by how much, when the next wave of lender held foreclosures hits the marketplace?
These are among the foremost reasons why a lender and prospective tenant/buyer must carefully consider their options before agreeing to a lease/option transaction.
Another very important consideration for owner and prospective tenant is to reach an agreement on rental costs and the amount of money to be credited from the rent towards the down payment.
In order to arrive at a rental fee that is satisfactory to both, the owner needs local rental marketing information, and the renter will primarily be looking at affordability. The landlord will need to know what similar neighborhood properties are renting for. Here is where your real estate agent comes in. He or she has access to the information either parties need in order to reach an agreement.
Although many tenants would mainly consider whether or not the proposed rent is affordable, as opposed to checking local rental market figures, the landlord certainly wants to be sure that the property’s rental fees will be either higher than, or consistent with current rents in the area.
Although the renter would most likely prefer a locked-in purchase price, the landlord and tenant, considering the current, and likely, future volatility of the housing market, might give consideration to an agreement that the property will be sold at fair market value when the purchase option is exercised.
Basically, a lease/option agreement can be beneficial or detrimental to the best interests of either party. If the tenant decides not to buy the property at the end of the rental term, the property owner now has to arrange to sell, rent or lease/option the property all over again.
However, the landlord will have benefited by retaining the non-refundable option payments that were to be credited toward the property’s purchase price.
Tom Thomas, 8 months ago
Well I don’t know how the property market is out there in the states but i can tell you that it is dire over here in the U.K. Prices are falling and vendors are jumping out of windows. Now that the printing money exercise has finished there is only one way for prices to go.