The buyer benefits by having a stake in a house they want and time to sort out their financial affairs. This may be a particular concern to many first-time buyers now that lenders, in the wake of the subprime crisis, are more demanding when it comes to credit scores and less willing to consider down payments of less than 20%.
"From the seller's standpoint, they have somebody paying the mortgage for the next two to three years," Furniss says. "If they buy it, that's great. But if they don't, they are at least, hopefully, out of the woods as the market swings back. Also, I don't think [owners] calculate the amount of money it costs for a vacant house. There is the risk of vandalism. You have to have utilities and taxes. You have to maintain the lawn. There are many costs associated with it that people may not think about -- not to mention the mortgage payment."
There are potential risks for buyers and sellers. A housing recovery could lead the seller to take a loss on the agreed-upon purchase price. The seller, if they back out of the deal, may avoid the hassle of otherwise defaulting on a mortgage but still forfeit the added funds earmarked for a planned purchase.
A risk for both parties is that, at the end of the lease, the buyer still may not have saved enough money or earned an adequate credit score.
Buyers also need to be assured as to how their "option" payment and fees will be credited when they buy the home, or how much is refundable in the event they don't. It is also important that they understand -- and have in writing -- the terms for how long the agreed upon, "fixed" price will be guaranteed them.
As with any major purchase, a legal review of the contract is crucial, and that document should detail the nature of the transaction clearly and spell out the renter/owner relationship (including who is responsible for repairs, maintenance and insurance). It's advisable to have a home inspection performed, even if you don't plan on buying the home immediately, as unfortunate discoveries could be reason to back out of or renegotiate the deal.
To avoid scams, renter/buyers should demand to see proof of the home's ownership; many have been ripped off by sellers who pocketed their money even though the house was well on its way to foreclosure.
-- Written by Joe Mont in Boston.
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