A young couple recently asked me about rent/option homes in Boca Raton. This is what I told them.
If you’re looking for a single family home in Boca Raton, and you are hoping to find a rent/option, you may want to ask your Boca Raton realtor to look at rental homes.
Look among rental properties.
While rent/options are scarcer than meteorite fragments, you are most likely to find them among rental homes because those owners are often not in a hurry to sell.
In order to ultimately purchase your home in Boca Raton, you will need to find an owner who is willing to wait 2 to 3 years for you to clean your credit or accumulate enough for a down payment.
Someone selling a home in Boca is looking to close with 30-60 days. So this type of owner is highly unlikely to consider a rent/option.
Expect to put down a sizeable, non-refundable deposit.
If you enter into a rent/option arrangement to purchase a Boca home, the owner is likely to ask you for a sizeable, non-refundable deposit. That deposit will allow you to exercise your option to purchase within a certain period of time, usually two – three years.
That option gives you the right, but not the obligation, to purchase within a certain period of time. But remember, you will have to pay the owner an agreed-upon sum for that option.
During that option period you will also need to accumulate enough money to use toward a down payment, clean up any credit issues you have, and prepare yourself to purchase when it is time to exercise that option.
You will need a mortgage at the end of the option period.
If you’re wondering why you’ll need a mortgage at the end of the time period, it’s because the owner expects to get paid in full if you exercise the option. Of course, If you are able to accumulate enough cash to buy your home in Boca Raton at the end of the option period, then a mortgage may be unnecessary.
While you have the right to purchase (or not purchase) when the option terminates, the owner has the right to keep your deposit if you do not exercise your option.
Rent payments won’t help with this process.
After a great deal of searching, you find a 2300 square home in Boca Raton with a rent of $2500 per month. That’s $30,000 per year, all of which is rent, and none of which will apply toward your eventual purchase price.
In order to rent, the owner will expect you to put down a first month, last month, and security deposit. Your total will be $7,500. This is a standard rental deposit.
How the rent/option usually works.
Suppose that and you and your spouse know , even before you even sign the lease, that is your dream home. It’s got everything you’ve talked about. You know you have to own this house.
The problem: you can’t afford it now, but you think you’ll be able to in 2 to 3 years. So you ask the owners if they’ll consider selling the house to you at the end of 2 or three years, providing, of course that you remain there as renters.
They say yes. Best of all, they agree with you that the purchase price during the period of the option is going to be $325,000. However, in order not to sell that house to someone else during that time, and in order to guarantee that the price you discussed today will remain the price when you’re ready to purchase, the owners and you sign a contract known as an option.
It gives you the right, but not the obligation, to purchase that home anytime during that 24-36 month period. However, the owners want to charge you for that right. Usually, but not always, in this kind of situation, the money you pay for the option is credited toward your downpayment at the time of purchase.
But, if you don’t purchase, you will lose that money.
Ways to handle this process.
There are several ways to make sure you have enough money for your downpayment when it’s time to purchase.
The first, and the most common way, is to give the owners a sizeable, non-refundable deposit up front in order to secure the option. Then, it’s a mad rush to save every penny over the years and, most important, to fix your credit so you can get a mortgage when the time comes to purchase.
The second way is this: the same non-refundable deposit to the owners. Then, you pay money above the rent each month to the owners. These additional funds are set aside and also credited toward your eventual downpayment.
But, like the original deposit, they will be forfeited to the owner if you are unable to or choose not to exercise your purchase option.
Talk to your attorney first.
If you enter into a rent/option agreement where you deposit money up front, you want to be sure that the current owner will still be in control of the house when it’s time to purchase. You also want to know that your money will be there when it’s time for it to be credited toward your downpayment.
So the first thing you want to do, before you sign any agreement, is to talk to your attorney. He or she will probably tell you that while the landlord is entitled to keep your deposit if you don’t exercise the option, the money still needs to be protected during that period. The attorney may suggest that the funds be placed into an escrow account.
While that protects your funds for the future, it does not change the fact that you will lose your deposits if you are unable or unwilling to purchase the property at the close of the option period.
Talk to a mortgage broker to see what you can afford.
With that information in mind, you may want to talk to a) your attorney and b) a mortgage broker before you start searching for rent/option homes. This is important because that way, you may get an idea of how much house you can actually afford now, as a renter, and later, as a buyer, assuming you are able to qualify for a mortgage at the proper time.
If you don’t think you’ll be able to get a mortgage at the end of the option period you’re contemplating, then you would be wise to avoid this kind of agreement. Instead, just rent and wait to look for homes until you know you can obtain a mortgage.
Marc Jablon, The Jablon Team
RE/MAX Complete Solutions