When buying a home, there is more than one way to finance the home. Most people arrange financing through a bank, called the mortgage. Instead of borrowing the money from the bank, it is also possible to borrow the money from the home seller. This is known as an owner financed transaction. Another common way to own a home is to promise to buy the home with a mortgage in the future and make monthly payments to the seller until that time. This is a lease option. It is in essence renting the home, but with the option to purchase at a pre-determined price if you want to. For both the buyer and seller of a lease option, there are advantages and disadvantages. For the seller of a lease option, the advantages and disadvantages depend mostly on your personality and the amount of equity you have in the home.

For most people, a lease option is no option. When I ask people if they would consider a lease option, very very few say yes. When asked why, the answers vary from just not knowing how it works to not willing to take the risk. Though there is greater risk in a lease option over a direct sale, there are also greater potential rewards. The risk adverse person may not want to offer a lease option though the risks are generally less than what you are exposed to in the stock market. In the follow article, we will discuss the advantages and disadvantages of offering a lease option when selling your home.

The main advantages of a lease option for a Seller include (1) More potential buyer for your home (2) getting your asking price or more for your home (3) passive income. If you were also considering a rental, there are additional advantages. These include (1) a substantial upfront payment (2) occupant has vested interest in keeping the home in good condition (3) occupant is responsible for replacements and repairs, not the owner.

The major disadvantages of a lease option for a seller include (1) limited access to home equity (2) still responsible for the mortgage whether the occupant pays you or not (3) risk of damage to the home by the occupant (4) loss of access to future property growth. Each advantage and disadvantage will be discussed more specifically below:

1. Advantage: Having an immediate buyer. Like all free trade markets, the housing market continually shifts between a buyer's and a seller's market. In a seller's market, buyers are readily available and willing to pay asking price or more for the home. However, eventually all seller's markets turn to buyer's markets. At this point, there are few buyers, who can take their time and offer less for your home. A common driving force for a buyer's market is higher interest rates and a lack of readily available financing. In this scenario there are fewer buyers because a substantial percentage of the buyers cannot get financing through conventional means. In the current market, credit is the major issue. Banks are having to hold fast to their cash reserves to stay afloat and are only willing to provide mortgages to only the best credit scores. In this situation, there is a glut of buyers sitting on the sidelines, with plenty of cash flow to own a home but lacking the credit to buy a home. Offering a lease option gives these buyers a chance to purchase you home when otherwise they could not. For the person in a hurry to sell their home this could mean everything.

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