Home Buying Strategies: Lease Option?
One of the hardest problems for a buyer to overcome is moving up. How do you successfully sell your current home, get the funds, and then turn around and buy something new, all when inventory is so tight? It can be quite a daunting maneuver.
One idea to consider is a lease option. A lease option will reverse that process. Basically you find the new property, lock it in with an option, move in, then sell your current home. We are in the middle of a deal right now like that, and so far, everyone is happy.
Here is how it works in Marin County. The Buyer puts an offer in on the new home, with an option agreement. The option agreement requires funds be put down, usually 5% of the sale price, and given directly to the Seller. The funds are non-refundable, but applicable to the purchase price of the home. At the same time, the Buyer also executes a lease agreement to move into the home and pay rent to the Seller. Once in the new home, the Buyer sells their current home, then uses the proceeds to close on the new property.
For example, let’s say the Buyer finds a willing Seller at $1,000,000, with a lease price of $5000 a month. The Buyer puts down $50,000, which goes directly to Seller. They move in at $5000 a month; often a portion of the rent may also be applicable to the purchase. They then sell their home for $700,000, and use the funds to complete the purchase (which is now only $950,000, because the option payment has been deducted from the sale price.)
There are risks, of course, as the Buyer may get less for their home than anticipated. It also requires a Seller who is willing to wait a little while for their proceeds. But occasionally the stars line up and it can work for everyone involved.