Residential lease options, honestly?
OK, have to comment on recent influx of hype regarding how fantastic lease options are. Since investments in Portland real estate have chased the national numbers we knew that there’d be new schemes making headlines and sure enough, The Oregonian newspaper picked up on it. Interesting that this subject comes up more prominently while house sales are slow. Maybe there’s a reason?
A quick overview of lease options
Agreement is made between buyer/tenant and seller/landlord. Buyer may come in with zero down or thousands to “purchase the option.” Seller is essentially renting his home for a premium in rental payments and contributing this premium amount towards buyer’s down payment. At the end of the lease term, say 12 months, buyer has an option of purchasing the house for a preset amount. Should buyer choose to not exercise his option he forfeits down payment and/or rent premiums. While contracts can vary significantly, this is the overall premise. Buyer is purchasing the Option to Purchase, it’s not free!
Why do a lease option? From a prudent financial or conservative buyer standpoint… beats me. From a seller/landlord standpoint, go for it. These definitely benefit the seller in our current market. A few years back this scenario may have benefited the buyer… maybe. Though, in a hot real estate market why would a seller jeopardize an immediate sale by taking a risk on lease options? He probably wouldn’t and that’s why these deals weren’t around in 2005 – 2006.
Immediate gratification
Many Portland home buyers choosing this avenue are doing it for one reason. Financial issues. Most likely that financial issue means not qualifying for the purchase, waiting for another house to sell, or bad credit. Here’s a stretch; The best reason for obligating yourself to a lease option is that a particular house is so incredibly perfect that nothing like it will ever be available in the future, it’s one in a million. Not leveraging yourself further would be catastrophic! Now, how many buyers fall into this category?
The sales pitch
1. Get into a house while cleaning up your credit. Lease options do get you into a house, at significant cost. If you’re cleaning up credit could this money be applied towards the credit problems, accelerating a good credit rating? What if mortgage rates go up before credit is repaired and buyer still doesn’t qualify? Lease option money is out the window.
2. Get into a new house while waiting for your old house to sell. Lease option again gets you into a new house. One of the risky things about Portland’s current real estate market is that selling a house is not a quick process. Putting the cart in front of the house is part of the reason we’re in this housing predicament. Buying before unloading the old property means double mortgage payments. If you really have to move into a new place, rent (with no option). Payments will be lower than those with a lease option. Plus, if the market does slide another 10% in 2009 then that option price originally set is not going to be very attractive!
3. Get into a new house while building landlord/rental history. This was a new one to me but recently had to hear the pitch from a mortgage broker on why lease options were a viable avenue. Theory is that lending guidelines have tightened and banks are requiring that keeping an old home as a rental requires it’s track history to be 6 months long before rental income can be counted. Again, if you really have to move into a new place, rent first. You’ll be money ahead on a monthly basis and in 12 months you may not even want the house you’re lease optioning!
Opportunities to buy a house in Beaverton, Lake Oswego or anywhere around Portland’s metro areas have never been greater but think twice about doing it via a lease option. For more information on Portland real estate visit our website. www.maxwellsinclair.com
Tags: beaverton, buying portland oregon real estate, buying portland real estate, home buyer tips, lake oswego, lease options, portland, portland real estate options
