For many Kenyans, having a real estate investment is a long-term personal goal. When getting the real estate investment, many people use a mortgage to finance it.
Getting a mortgage may be very expensive especially if you have not prepared effectively for it. Furthermore, a mortgage can chew up a large amount of your income and would, therefore, require some preparation.
In event that funds are unavailable, or a mortgage is unrealistic, the immediate solution is usually to rent. Even though renting can seem cheaper now as compared to buying the property, it is expensive in the long-run.
A recent study revealed that a typical family spends, on average around one-third of their income on rent payments. Rent payments are expenses that do no earn you any financial rewards or returns. When you are starting out, you monitor and manage your expenses very carefully.
People who are in a hurry to rent out property are the perfect tenants for property owners. This is because as they do not have enough funds now to get a mortgage, they rent the property giving the property owner good returns for a number of years.
So even though many people quickly opt to immediately rent a house in order to gain some independence, you should be different.
Before you rent a property, consider negotiating for a lease option instead. A lease option enables you to turn your rent expenses into a long-term financial investment.
What is a Lease Option?
A lease option is a form of a financing lease contract, where the buyer agrees to rent a property for a period of time before exercising the option to buy the property before or after the lease expires.
Before you decide to take out a lease option, ask yourself the following questions:
- Will you be able to meet the monthly payments on the home and cover other costs of ownership?
- Can you meet the monthly payments on the lease?
- Will you be able to obtain financing at the end of the lease term?
How Does A Lease Option Work?
In a lease option agreement, a prospective buyer will get to move into the house they desire to own immediately. As they live there, they shall be expected to pay rent for a certain period of time (typically 1 to 3 years), after which they can choose to buy the house from the owner.
Typically, no two lease option agreements are similar, many people negotiate specific terms and conditions with the property owners.
After the lease period has elapsed, one still has to fulfill certain conditions as per the contract such as:
- Paying the Option Money: In a lease option, the prospective buyer pays the owner a one-time non-refundable fee known as option consideration or option money. It is a fee that shows the buyers commitment to the lease option contract.
- Agreeing to the Purchase Price: The contract specifies how and when the purchase price of the house will be paid. Sometimes, both parties may agree on a purchase price when the contract has been completed, at or above the current market value. But, in other cases, the seller and buyer may agree to decide on the price when the lease expires, at the market value during that future point in time.
- Paying Rent: During the term of the lease option agreement, the prospective buyer pays the seller a specific amount of rent every month. A majority of contracts apply a fraction of each rent payment, termed a rent credit, to the purchase price thus reducing the future value.
- Handling the Maintenance: Usually, the prospective buyer is responsible for paying for any repairs, property taxes, homeowners association fees, and insurance. The property owner usually should ensure that the repair and maintenance obligation is shifted to the prospective buyer and specified in the contract.
- Buying the property: If the buyer decides not to buy the property (or is unable to find an alternative financing option) at the completion of the lease term, the lease option expires. The former buyer has to forfeit any funds paid until that point, such as any rent credit and option money.
When Is A Lease Option A Good Idea?
Lease options can be attractive to both property owners and buyers. Especially for the buyer, a lease option is a good idea because:
- In the event that you are unable to qualify for mortgage financing, a lease option is an excellent option for you to own a home.
- If you have a poor credit score that is below the minimum set by lenders for providing mortgages, a lease option is a way for you to work towards that financial goal.
- If you have not been saving up to pay for a mortgage deposit, getting a lease option allows you to rent the home as you accumulate funds over time which you can use to secure financing.
- You can be able to buy a house at a fair price. With lease options, financing gives buyers a chance to lock down a fair price that is easier to manage and plan towards achieving.
So, before you think about just renting, please consider the lease option. Take the time to find a property you like now, and in two, three or more years when you improve your financial circumstance, own the property.
Be sure to understand your responsibilities and rights in the lease option agreement. Take time to clearly discuss all the terms and conditions of the contract with the property owner and a legal advisor so you end up getting value out of the arrangement.
If you ignore this, you might end up in a rent-to-rent situation without making any headway towards homeownership.
So with a lease option, it may seem cheaper than a mortgage in the short-term, but it still requires you to commit a significant amount of money. The good thing is that you can carefully plan this investment.
What is your experience with renting? Would you try out a lease option? Let us know what you think in the comments section below.
All the best!