Looking for a rent-to-own home on the real estate market? Chances are the sellers ask you to pay the option fee before agreeing to initiate the purchase process. Read on to discover what those are.
The option fees and earnest money are often confused for one another. Here, we will focus on an option fee since most rent-to-own agreements obligate the buyers to pay that initial fee to the seller. Once the contract is executed, the option period will start right away.
It’s a non-refundable fee paid by a homebuyer to a landlord/seller that is aimed at securing the option to purchase the home later on. The buyer also has the option to terminate the contract at any point during his/her lease.
Why Should I Pay an Option Fee?
An option fee reassures the seller that the buyer truly plans to purchase the home. At the same time, it discourages the buyer from walking away from the property and closing on a house before the lease term expires. The last thing you want is to lose the money you have spent on your option fee and premium payments.
As a potential buyer, you will have the unrestricted right to terminate your agreement by notifying the owner within a specified number of days after the effective date of the rent-to-own contract. It is determined by the contract in the termination option paragraph. The amount of the option fee, number of days, and sales price are some of the things negotiated between the buyer and seller.
The seller, on the other hand, will not be able to take back the option if he/she decides not to sell the property. So while the seller must sell, the buyer is not required to buy when it comes to lease-option contracts. What’s more, the seller doesn’t have any control over the time of payout.
Nevertheless, the sellers have some confidence that the property will be purchased when buyers have a considerable amount of cash on the line. So no matter the sellers want the full payout, they often find the option fee adequate compensation. The option fees are regarded as ‘consolation prizes’ for the sellers.
How Much Is It?
Option fees commonly go from 2% to 5% of the property value, easily be broken by sellers and buyers. Sometimes sellers want to penalize a less desirable candidate by increasing the option fee. This applies to buyers with a criminal record, poor work history, bad credit score, etc.
Apart from that, the seller might seek a higher option fee to get more reassurance when entering into a rent-to-own agreement. If the buyer requires a longer rental period, a higher option fee ensures that the buyer intends to buy the home. No seller wants to waste his/her time. Similarly, ideal candidates may ask for lower option fees.
While the option money can be sent to the title company, there is some liability for the listing agent who delivers the funds. A real estate agent hired by the buyer typically insists that the cash is delivered right to the seller or the listing agent. Please note that the delivery usually takes up to three days of the contract execution.
Some sellers are willing to receive non-monetary assets, services, or items instead of cash. This may include everything from legal services and home repairs to cars and boats. In that case, the value of goods and/or services should be determined and included in the agreement.
What’s Going to Happen to My Option Fee?
The option fee will be in escrow as long as your lease is active. Once you buy the home, it will be applied to the down payment or purchase price. If you do not purchase the property, your option fee will be kept by the seller.
For example, if you pay a $6,000 option fee for a house whose value is $150,000, it will be officially sold for $144,000. Your down payment will be $28,800 if you get a conventional mortgage. If the escrow money is applied to the down payment, the home will be sold for $150,000.
Each application has advantages and disadvantages. Your choice will depend on how much you want or can afford to pay monthly for a mortgage as well as the amount saved up for the down payment. If you have more than enough money for your down payment, you will want to apply the funds to the sales price. That will decrease monthly mortgage payments.
Related: Rent to Own vs Rent