Lease options are coming back into vogue, updated with some unique consumer-friendly provisions, just in time for a changing market.

The latest offering, from Denver-based realty property investor Simpson Property Group, is a lease-option deal for its participating tenants who agree to purchase a new home from participating new home builders -- without paying additional rent.

Earlier this year, Englewood, NJ-based First Financial Equities, Inc. and other lenders teamed up with Freddie Mac to offer a lease-purchase program for eligible home buyers who first lease a home and later assume the balance of the mortgage payments -- all based on the true monthly cost of the mortgage.

For much of the past decade, widespread seller's markets gave sellers their pick of buyers and creative financing techniques, including lease options, fell from grace. Sellers avoid lease options in hot markets because they typically come with a contractually agreed upon price. In an appreciating market the seller could be stuck with the contractual price even if prices rise by the time the buyer was ready to close the deal.

Recently, however, higher prices are making buyers balk and lease options appealing.

For the first time since 1992, there are more new homes than there are buyers, according to a recent release by Irvine, CA-based The Meyers Group, a real estate consulting and information service.

At the current rate of housing demand and construction, approximately 1,671,000 new housing units are needed annually while builders are supplying 1,808,000, a supply that exceeds demand by 8 percent, according to Meyers.

Lease option contracts also can be a solid option for cash-poor, but income-rich buyers -- they don't have a down payment but can afford a mortgage. How options work

Options typically include a potential buyer, the lessee, who pays rent to the home owner, the lessor, who wants to sell the home. Some or all of the rent and sometimes an option fee is held to accumulate the down payment. At the end of the contract, usually six to 12 months, the lessee has the option to use the down payment toward the purchase of the home for an amount agreed upon at the onset of the contract.

Considered the Pandora's box of creative financing, lease options are often a better deal for the lessor, particularly one who has already moved and left the property empty. During the contract, the lessor acquires rent as income which acts to dam up any equity drain. If the lessee opts to buy, the lessor has reached his or her goal. If the lessee does not exercise the option to buy, something that occurs as often as 80 percent of the time, experts say, the lessor gets to keep the option money and all the "rent".

Also, if the buyer can't qualify for a loan at the end of the contract, he or she loses money paid into the option. In a down market, if the value falls, the buyer will have to buy at the higher, previously agreed-upon price, or again, lose the cash paid into the deal.

Keeping up with lease-option payments also can be tough. A lease-option's monthly payment is generally higher than the going rents for identical rental properties because the lease option payment must cover both rent, down payment savings and maybe an option fee.

New option

Simpson Property Group's SAVE (Start Accruing Valuable Equity) program removes the higher rent dilemma, by allowing its renters in Colorado, Oregon and Texas to continue to pay the same monthly market rental rate, but earmark 20 percent of it, as accrued credit, toward the cost of a new home.

SAVE requires new or existing renters to have at least a six-month lease and pay a $40 sign-up fee. Renters can accumulate up to 2.5 percent of the cost of a home -- $5,000 on a $200,000 home. The accrued credit can be used only with affiliated builders and only where they are set up to participate.

That currently includes Richmond American Homes, Pulte Homes and The Writer Corporation, all in Colorado; Centex Homes in Oregon; and Pulte Homes and Richard Fuller Homes in Texas.

You don't have to purchase a home in the area where you currently live, provided you purchase a home were a participating builder offers new homes for sale. You can retain your accrued credit if you move before you are ready to buy, provided you move to another Simpson community. Like traditional lease option programs, however, if you don't use your credit to purchase an affiliated builders home you lose it. In this program, because you'll pay only market rent, rather than an extra amount, as with more conventional lease options, you'll lose only the $40 sign-up fee.

The program doesn't guarantee that you'll qualify for a home, that's up to your credit worthiness as established by the builder. If you don't qualify, again, you lose the fee.

"What's nice about it is, except for the sign-up fee, it's not costing them any money," says Tina Lombardi, a Simpson spokeswoman.

Simpson says 110 residents are currently participating in the program. Since the program began in March, six tenants have purchased homes through the program.

"We are finding them a home and they are typically staying in our apartments longer because this gives them time to be selective and wait for a new home to be built," Lombardi said.

Lender option

Established earlier this year, the Freddie Mac program available through First Financial Equities and other lenders in 40 California cities and soon to be released elsewhere, is more like a traditional lease option plan -- with a spin of its own.

Eligible buyers who come up with 1 percent down can lease a home for 38 months and then assume the balance of the mortgage payments or decline the purchase. The lease payment will be based on the true monthly cost of the mortgage, plus an administration fee.

Participating communities use municipal bonds to subsidize an additional 3 percent down and all closing costs for qualified first-time home buyers with household incomes between $35,000 and $77,500. The maximum loan is $252,700. Qualified participants are not required to pay private mortgage insurance, but the additional nominal administrative fee will be tacked onto the monthly payment.

The 1 percent down payment is considered a participation fee (much like a security deposit for a rental contract) which the potential home buyer will forfeit if he or she decides not to assume the mortgage at the end of 38 months.

"We've also relaxed credit requirements," said David Siegel, program manager.

"This program is available for people who wouldn't be able to come up with the down payment. If they were to go out and get a comparable mortgage, they would have to get a much higher rate," Siegel added.

Lease option reference guides

Published: December 28, 2000

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Broderick Perkins parlayed a career in old-school journalism into a contemporary digital news service that really hits home. The award-winning consumer journalist, originally from Wilmington, DE, is founder, publisher and executive editor of the bootstrap DeadlineNews Group, a Silicon Valley-based editorial content and consulting service specializing in residential real estate, consumer news and related editorial consulting services. The DeadlineNews Group includes the website, DeadlineNews.com, offering real estate editorial content and consulting services, and its back shop, the Deadline Newsroom, an open house on news that really hits home. Perkins obtained his formal journalism education from University of Delaware and a journalism boot camp, the Institute of Journalism Education at the University of California-Berkeley. He went on to 20 years of service as a daily newspaper journalist at the Wilmington, DE News Journal and San Jose, CA Mercury News. Perkins covered housing on the San Jose Mercury News reporting team which earned a General News Reporting Pulitzer Prize in 1989 for coverage of the Loma Prieta earthquake. He has also produced real estate, consumer and small business content for the Wall Street Journal, Los Angeles Times, RealtyTimes.com, Nolo.com, Better Homes and Gardens, the National Association of Realtors, Homestore/Move and Intuit/Quicken among more than three dozen publications. In addition to managing the DeadlineNews Group, Perkins most recently served as chief editorial consultant for Nolo's Essential Guide To Buying Your First Home, Nolo, and writes real estate television scripts for RealtyTimes.com.