Purchasing a Personal Home Using Lease-Option, Anything I Should Be Careful About?

13 Replies

Hello BP friends,

I am about to place an offer on a home which I plan to live in, using Lease-Option with a 3-year length (option to extend 2 more years with Seller's consent).  I feel confident in my ability to refi or flip the house within the 3 years. I am attracted to the idea that I can control the asset right away and be able to move in, without having a personal mortgage on the books immediately. I am in the middle of acquisition and refi of a couple multifamily rentals and I don't enjoy doing multiple refinances concurrently :).

I have never purchased a property with Lease Option before, but I have purchased via Seller Financing. It seems like the basic format is pretty much the same, except with Seller Financing if I don't refi on time, the Sellers have to foreclose on me, whereas with the Lease Option I'd lose my down payment and Principal payments.

I'm aware that I need to make sure the paperwork gives me the right to Assign the deal (aka flip the house without ever exercising the right to purchase it in my name).

Is there anything else I should watch out for?  Any key differences between Lease Option and Seller Financing that I ought to be aware of?

Any feedback would be appreciated! @Tim Jones and @Nicholas Jones wish me luck!

That's fantastic, Jeremy! Good luck, and I'm interested to hear the details. That might be an avenue I could take as well. 

In a lease option you are basically renting the property but you have an option to buy it at an agreed upon amount before the option expires. You don't actually close on the property until you exercise your option on the property. With seller financing you actually close on the property with the seller carrying a note for the amount you borrowed that is the principle difference. 

One VERY IMPORTANT thing you should do. Make sure you get your option contract signed, notorized and FILE IT WITH THE COUNTY. This clouds the title and protects you should someone come a long at a later date and offer the seller more than your option price. 

@Anthony Micklus thank you for your reply, and excellent tip! So, provided that I *do* file it with the County, then essentially I *control* the property even though it is not titled in my name, correct?  I would also have the right to assign that lease option to another buyer which would allow me to flip the property.

My understanding is that my monthly payments would be based on a 30-year amortization schedule where my principal payments are building up as credits, whereas the interest payments go directly to the seller.  So my initial down payment and my monthly principal pay-down becomes my "cash in" when I do a refi or flip it (via assigning the option) to another buyer.

I'm curious whether my "mortgage interest" would be tax deductible like it would be with a traditional mortgage.

The terms are between you and the seller. If he wants to take all or part of your payments and reduce your purchase price even more that is his choice just make sure it is stated clearly in the paper work. I would also as a precaution put into the Lease Agreement that you have the right to Assign the Option at any time. I am not an attorney and I strongly suggest you run your paper work one before you sign anything.

Since you don't technically have a mortgage I doubt you would be able to get any tax break but you might be eligible for a renter's rebate if such a thing exists in your state. Sorry I am not an Accountant either and you might want to talk with one of them before you commit to anything.


Hi @Nancy Brook it is on the MLS but I found it by searching Craigslist for "Seller Financing". It came up because the agent had indicated "Special Financing offered by Seller". Turned out they were open to a Lease Option offer.

@Anthony Micklus  thanks again for clarifying, I'm starting to get a picture of things.  I'll definitely have a lawyer reviewing the contract and will get feedback.

I agree with you, I probably won't be able to write off mortgage interest, but I can probably write off some of my leasing fee since I'll be running my business out of the home office.

If you don't own the house, I don't see how you could flip it (sell it).  You'd be selling your option to someone.

I question whether or not that would be profitable for you. If it's on the MLS and hasn't been snatched up at the selling price by a traditional buyer, I'd question the value of your option.

I was always warned away from lease to buy options, but that was many many years ago.  Maybe things have changed.  I hope you come back and let us know what your attorney says.  I'd love to learn about this.  Good luck!

Hi @Sue K. , I'd potentially "flip it" by Assigning my exclusive option-to-buy to another buyer for a price.

It has been on the MLS 20 days and has a had a couple offers but hasn't gone into contract yet. Turns out the Seller doesn't need a big chunk of cash, and prefers a steady stream of cashflow for the time being. So the lease-option discussion and seller financing possibilities arose from that.

I'm not certain whether it will be profitable either :). My primary goal with this purchase is to  acquire my primary residence, and this house fits my needs perfectly.  I would *like* the purchase to work out well financially (maybe turn into a profit), but primarily I am trying to tie-up a suitable primary residence in a rising market, without having to immediately get a mortgage given that I have other refinances in-progress.

Originally posted by @Jeremy Jones :

Hi @Sue Kelly, I'd potentially "flip it" by Assigning my exclusive option-to-buy to another buyer for a price.

It has been on the MLS 20 days and has a had a couple offers but hasn't gone into contract yet. Turns out the Seller doesn't need a big chunk of cash, and prefers a steady stream of cashflow for the time being. So the lease-option discussion and seller financing possibilities arose from that.

I'm not certain whether it will be profitable either :). My primary goal with this purchase is to  acquire my primary residence, and this house fits my needs perfectly.  I would *like* the purchase to work out well financially (maybe turn into a profit), but primarily I am trying to tie-up a suitable primary residence in a rising market, without having to immediately get a mortgage given that I have other refinances in-progress.

 Hi @Jeremy Jones, Thanks for explaining.  I see.  So, you get to move into the place, and have 3 years to live there and sell your option to someone else, or exercise the option and buy the place.  

Until you exercise the option, does the LL do the maintenance and pay taxes, etc?

It sounds like a condo I bought in CA many years ago, in a way.  It was a seller financed sale, and the market was in the toilet at the time, 1995.  And it's difficult to get financing for condos, so the owner financed the sale to me, with a very low down payment, but a higher than market interest rate, and a balloon payment (full balance due) in 10 years.  I would not have been able to get bank financing on it.

I "owned" it, though, so the HOA fees, taxes, maintenance etc., were mine. And I did sell it for a profit several years later, after I learned I hate living with an HOA LOL.

Your deal sounds like it may work out quite nicely for you.  I wish you the very best of luck!

Good luck with the deal. I think it will be a win-win :-)

Hi @Sue K. yeah sounds like I am trying to do a similar thing you did. (I also prefer not to be at the mercy of an HOA!)

I will be responsible for taxes and insurance under this arrangement, so it will be like I "own" it but the Deed isn't recorded in my name until I exercise the option and complete the transaction.

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