by Victoria Hunter

Created on: November 20, 2009   Last Updated: November 21, 2009

Homeowners who are considering putting their homes on the market, generally don't stop to think about seller financing. Whether they don't quite understand the different methods or they aren't aware of the benefits, it just isn't something a lot of folks entertain.

In a slow real estate market, a savvy home seller will pull out all the stops to get his home sold and seller financing, especially the lease option, may be just the way to do it. For the buyer, it's a terrific way to buy a home when you lack a down-payment.

A lease option, sometimes known as "rent-to-own," is basically what it sounds like: a person leases a home and has an option to purchase the home at the end of the lease. This type of transaction involves the use of two separate contracts, a basic lease and the option contract.

Here are the basic parts of the lease option:

Purchase Price

This is, of course, negotiable. When the lease expires, how much will the tenant, who then becomes a potential buyer, pay for the home? This is a bit sticky; how does anyone know what a home will be worth a year from now? Whatever price is agreed upon, it will set the stage for all the other parts of the lease option process.

Lease Term & Payment

The lease term is the length of time the tenant will lease the home prior to exercising her right to buy the home. Again, this is negotiable and works just like a standard lease.

The payment refers to rent. Rent will generally be higher than market rents and the excess is sometimes used as a "rent credit," and go toward the tenant's down payment should she decide to buy the home. For example, if market rent for the home is $600 a month, the tenant may pay $800. The extra $200 a month will be set aside to be used toward the down payment on the home should she decide to purchase at the end of the lease. The rent credit amount is also negotiable.

Option Consideration

Option consideration is a non-refundable deposit, usually a percentage of the purchase price of the home. Consideration money binds the deal. Should the tenant not purchase the home, the homeowner is entitled to keep this deposit. On the other hand, should the tenant decide to purchase the home, the option credit will be applied to the down payment (upon lender approval).

Option Term

The option term is the amount of time that the lease runs prior to the tenant exercising the option to purchase. Typically, this amount of time will be the same as the lease term.

At the end of the option term, should the buyer decide to exercise the option to buy, he proceeds with a standard purchase via a lender of his choice.

The lease option is very easy to negotiate between buyer and seller which leads a lot of people to feel they don't need outside advice. This is a legal arrangement and contracts are involved. Unless you are very familiar with real estate and contract law, you should run everything by an attorney prior to signing anything.

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