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please send an e-mail to: “mark@markkillion.com”

I provide FREE assistance to all buyers and renters!

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In a “rent-to-own,” or “lease-option,” arrangement,
the seller is giving you the right — at some point in the future —
to buy the house at a price that is agreed upon today.

Usually, a portion of your rent over a specified lease period
goes toward your eventual down payment. Typically, a tenant
would pay slightly above-market rent over the lease period,
usually from one to three years, for the right to enter into this
arrangement.

It’s also common for the tenant to pay a fee in
“option money” for the privilege of having the
option to buy the property. The option money is non-
refundable! Its usually equal to about 3 months rent!

For example, if a house would typically rent for $1,000,
the option fee might be $3,000! You might be asked to
pay $1,200 per month, a portion of which, say $500 —
would be credited to your eventual down payment, depending
on the contract you work out. Such an option usually
expires at the end of the lease. In other words you must
exercise the option before the lease expires.

But be careful. In some lease-purchase agreements, you are
contractually obliged to buy at the end of the lease.
Sellers and agents now often use the two terms interchangeably.
But whatever name they attach to the arrangement, make sure you
have the option.

The arrangement gives you more time to think about the deal
plus provides a built-in structure to save for your down payment.
It also allows you to discover any flaws in the home that may not
have been detectable on an inspection and to get a feel for the
neighborhood without committing to a long-term mortgage.

However, it’s usually a good idea to first talk with a lender about
eventual financing for the house before entering into a
lease-purchase pact. Many would-be purchasers in these
arrangements find they can’t buy at the end of their lease
anyway, often for the same reasons they couldn’t buy at
the start of the lease: bad credit, insufficient down payment,
not enough income, etc.

In that event, you would lose your option money —
in the form of an up-front fee or added rent — and
any deposit you made. On top of that you would have paid a
higher-than-normal monthly rent.

In areas where real estate values are quickly rising,
locking in a purchase price on the day you sign the
initial rent-to-own contract could be very profitable for you.

If appreciation is significant during your lease portion,
you come out smelling like a rose. The problem with this
theory is that good lease-to-own deals are generally
scarce in hot sellers’ markets. If a seller sees rapid appreciation,
there is no motivation to agree to sell at today’s
price a year or three years later. Only owners who’ve had
their properties on the market a while, or had to move away quickly and
are struggling with two house payments, are likely to agree
to a lease-purchase arrangement.

Another potential disadvantage is that you may be obligated to tend
to repairs and maintenance throughout your lease stage, instead of
the landlord. Under most lease-to-buy contracts, any money or sweat
equity you put into major improvements will not be reimbursed in
the event you eventually opt out.

Where do you find rent-to-buys? Most real estate sales agents
and real estate rental agents have listings. Good luck!

Poster’s word of caution:
Please consult with a real estate agent before entering into
a rent-to-own deal. Some areas in the city are declining in value.
You want to make sure that the agreed purchase price is
low enough to make sense. If your Realtor says that the home is
in a neighborhood where sales are slow, try to get a purchase price
that is 5% lower than current market value.

The lender will not finance an overpriced property,
you will have to pay the difference in cash at closing
Honestly, if the house is in a “declining market”,
or an area where foreclosures are abundant,
chances are that the deal won’t make $ense.

Until the next time,

Mark Killion
Real Estate Broker
Century 21 Affiliated
5200 S. Harper Ave
Chicago, IL 60615
24 Hour Voice Mail: 312-242-1822
Send me a note!

Visit me online: www.773property.com

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