SACRAMENTO -- Mike and Sharon Caudill recently moved into a $139,950 house in suburban Sacramento. They put $3,000 down and are paying $950 monthly.
They couldn't find a lender to agree to such terms. But the homeowner did.
The Caudills don't own the three-bedroom, two-bath house they live in yet. But they have an agreement to buy it within two years under a lease-option purchase contract with the owner.
"We'd need almost $15,000 to buy a house like this and we don't have it," Mike Caudill explained. "The lease-option fits our needs perfectly. It enables us to save money toward the down payment, lock in the price, and pay off our credit cards. It prepares us mentally, too."
Under the Caudills' agreement with the seller, $200 of each monthly payment will be credited toward their down payment, along with most of the $3,000 option fee they paid up front. They also hope to save $7,500 during the next two years to help with the purchase.
Greg Nichols, owner-broker of Midland Properties, acknowledged that the lease-option is "kind of a forced savings plan" for buyers. "It can really help young couples who are income-strong but who lack the cash for the down payment," he said.
Across the nation, there brokers have seen a surge in the popularity of lease options in recent months, and they attribute the popularity of these agreements to the glut of properties on the market.
"Sellers are more willing to try alternatives in difficult times," said Mary King, a broker with the South Placer office of TRI Realtors.
Mr. Nichols regularly suggests lease-options to sellers whose listing agreements have expired. Peggy Green, a Sacramento widow, was one of these. Two weeks after advertising her house was available under a lease-option arrangement, she said, she got an offer.
Using that same approach, Ms. King paired a buyer and seller on a house that had an asking price of $175,000. In that situation, she said, the buyer came up with a $10,000 option payment and agreed to pay $1,250 rent. The owner, in turn, offered to credit $900 of that monthly total toward the down payment.
That doesn't mean, however, that lease-options agreements lack flexibility.
"Just about everything is negotiable," Ms. King said.
Typically, such contracts are for one or two years, although they sometimes run as long as three or four years. The price of the house may be agreed upon immediately -- or based on an appraisal at the time the option is exercised.
The option payment is non-refundable -- which means it's forfeited if the option isn't exercised -- and not all of it may go to the seller. A portion of it may be retained as a brokering fee by an intermediary who arranges the contract, Mr. Nichols said.
Moreover, as in traditional sales transactions, the agent or others who brought the principals together usually receive a commission from the seller when the house is sold.
The lease-option obviously won't work for everyone, Ms. King said. "It requires a seller who doesn't need cash up-front, and who has another place to live."
On the buyer's side, she said, the tenants must be able to to accumulate the necessary down payment during the lease period, and then to qualify for a mortgage when the lease is exercised.
Lease-option experts also note that buyers should be aware that the sales price on properties with such contracts may be higher than the current market value because sellers may factor in some appreciation. But at the same time, they point out, the benefits to the buyer may still outweigh those of the seller.
Here are some suggestions for buyers:
* Get prequalified for a mortgage and make sure you will be able to accumulate the necessary down payment during the lease period.
* Have the house inspected first and document any repairs needed and who will be responsible for them.
* Check that no liens are recorded against the property.
* Make sure that the mortgage and taxes are being paid so the property doesn't fall into foreclosure.
* Record the option against the property so it cannot be sold.
* Decide who will be responsible for maintenance of the property.
And some advice for sellers:
* Make sure there is language in the contract to provide restitution in cases where there is serious damage to the property and the purchase is not exercised.
* Specify what type of improvements will be allowed, if any, during the lease.
* Indicate whether the option is assignable or permits subletting.
* Do a credit check or get proof that the buyer is qualified to make the purchase.
The secret to making lease-options work, brokers conclude, is to anticipate problems that might occur and to deal with them in the contract.