You need to understand all the terms of the deal, including the duration of the deal and the amount of the option fee, which can be arbitrary, but typically range from a few hundred dollars to 20% of the value of the home. Typically, you pay more than the market price, with a portion of your rent going to a future down payment for the property. You should seek advice from a real estate lawyer who has experience with these agreements to review the contract before signing it. “When you purchase a rental option, you bet you qualify for a mortgage and are able to execute and buy the property,” says Timothy McFarlin, a Los Angeles-based real estate attorney. “Make sure you have a way to do it.” The IRS has classified these transactions as installment sales, not leases, and special rules may apply to them at tax time. A portion of the buyer`s rent payments can sometimes be classified as interest and would therefore be tax deductible. A hire purchase agreement can be attractive to a seller in a competitive market because they are able to retain a buyer and get a monthly payment. The seller is usually able to charge a higher rent than he would normally receive in a traditional lease. At the same time, a seller who wants to have access to a large sum of money does not receive these funds in a leasing purchase. If the value of the house increases after the lease expires, the seller cannot realize the increase in value, as the parts are usually tied to a purchase price.
The biggest drawback, of course, is that hire-purchase agreements are multi-year contracts. This implies a certain level of risk and uncertainty that many sellers want to avoid. Whichever side of the hire-purchase agreement you`re on, the deal can be a winner. However, since all aspects of this private business are left to the individual parties, carefully consider your needs and interests when developing the terms. A rental option is a contract in which the landlord and tenant agree that the tenant can purchase the property at the end of a certain period of time. The tenant pays an initial option fee each month and an additional amount that applies to any down payment. If you decide not to buy the house at the end of the contract, you will lose your option fee as well as all the money you spend on a down payment, but a seller cannot come after you to decide not to force the purchase. A lease-purchase option is a possible way for a buyer who currently does not have enough money for a down payment but will do so in the next few years, or for a buyer who has credit problems that are resolved within the same period.
Any increase in the value of the home during the rental period also goes to the buyer, so equity can be built before the actual purchase. Today, purchase options, lease options and hire-purchase agreements are three separate financing documents. While similar, they differ in finer details because the differences are state-specific and not all states have identical laws. Consult a real estate lawyer before entering into any of these agreements with a seller to make sure you understand the implications. .