Lease option, also known as the rent-to-own option, is a home purchase option that does not require a mortgage plan right away. It’s an alternate installment plan in buying a Malaysian house that does not right away require a down payment nor a mortgage financing, but will assure the potential home buyer that the house will be held off the market for him.
In a lease option agreement, as is implied in its moniker (rent-to-own), the potential owner pays a rent – usually much higher than fair market rental fees – monthly and a portion of which goes to a ‘fund’ that will be slashed off the total selling price of the house as equity. This ‘portion’ is decided by the mutual agreement entered into by the home buyer and the home seller; it could be 25% of the rent, 50% or maybe even 100% although this happens very rarely.
The lease option agreement is good for a set number of years, at the end of which, the equity or accumulated ‘fund’ is taken off of the original selling price of the Malaysian house. It is at the end of this lease option agreement that the home buyer decides whether or not he pursues to purchase the house at the more traditional, mortgaged payment scheme, or bails out of it to get a better deal elsewhere.
Risks for the Buyer
The thing about lease option is that, if you’re the buyer, you’ll have to contend with the fixed rate of the house no matter how much the home’s value appreciated or depreciated over the course of the lease option agreement. Should the house depreciate, you’d have to pay an above fair market rate for it anyway because that’s what’s on the agreement. Should you choose to bail out of the agreement, there is no way you’re getting back all that cash you spent on the equity.
This is a good option like the Orion, however, if you are not earning enough to qualify for a decent mortgage loan or if your credit record has been so bad in the past that no lender would want you on their list.
Risks for the Seller
A bad tenant who decides to bail out of your lease agreement may be a rent-to-own seller’s worst nightmare. Not even the accumulated equity would be enough to pay off for any damage and repair costs the bad tenant leaves behind.
Also, in the event that a tenant actually decides not to buy the house at the end of the agreement, you as the poor owner would have to go through the same process again. Not to mention, you’d be on the losing end if your property gains value since you’d have to sell the house at its fair market price from several years ago.
As a solution, you’d have to put the monthly equity fee to good use during the time the lease option agreement is in effect; otherwise, there would be no telling where it goes should the home buyer decides not to buy the house in the end.
See previous blog post for references. Thanks!