Consider ‘tryout’ option

If your vacation house or cabin already has been sitting for sale long enough to bite into your comfort and affordability zones, you might want to consider a lease option.

A lease with an option to buy can often solve a two-mortgage problem for a seller and provide a cash-poor buyer with an opportunity to “try out” a house while getting a portion of the rent credited toward a down payment.

Here’s how a typical 12- to 18-month lease agreement, with an option to buy within the lease period, works:

* The buyer and seller agree on a purchase price, usually a figure somewhere between today’s market value and the anticipated value in 12 months’ time.

* The seller gives up some of tomorrow’s presumably higher value for money in hand today. The buyer pays a bit more than today’s value in exchange for very little cash down.

* The buyer pays the seller a nonrefundable fee for agreeing to this option. Typically, this lease-option fee is a one-time lump sum. The amount can vary depending on factors such as how eager the seller is to move and the size and quality of the house.

Let’s say buyer and seller agree the price will be $335,000, and $3,000 is the fee in our hypothetical transaction. The fee is in addition to the monthly lease-option payments. And we’ll have the seller give the buyer the right to purchase the property for $335,000 at any time within the lease period. If the option is exercised, the fee could be considered part of the down payment.

The lessee has made no down payment, hence the monthly lease-option amount is typically higher than rental market rates. The two parties agree on what portion of the monthly lease-option amount will be applied to the down payment. Any amount can be credited. For example, if the monthly fee is $2,000, $800 could be credited to the down payment. (If the seller really is not eager to sell, he may not agree to a higher rent credit.)

Buyer and seller must be sure to specify both lease and sale terms in the agreement. It’s a good idea to set an interest-rate ceiling in the agreement, or ask the seller to finance the home when conventional rates hit a certain level.

Sellers should read their mortgage agreements carefully before entering a lease-option agreement. Some lenders may activate a “due-on-sale” clause if the seller enters a lease option with another party. Many times, lenders will permit a specific lease-option period if notified in advance. And, lenders usually are more willing to participate when they are assured of future business -- like the seller or buyer’s new mortgage loan.

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Tom Kelly is co-author of “Cashing In on a Second Home in Central America.”