Under a lease-optiondeal, the buyer agrees to rent a property for a period of time,typically several years, with the option to purchase it, usually at aset price, during that time. The tenant typically pays an above-marketrent. (If the normal rent for the property is $1,000, he or she mightpay $1,300.) But each month a portion of the rent (in our example,maybe $500) goes toward building a down payment. When the buyeraccumulates enough money in the seller's account (after three years inour example, he or she would have $18,000), that money is creditedtoward the down payment. The buyer would then obtain a mortgage andexercise his or her option to buy the property. If all goes well, theperson's tenancy changes to ownership.

The advantages for thebuyer are obvious. He or she is forced to accumulate money that willeventually be used as part of a down payment. More importantly, theperson usually locks in a price upon moving in. With the recent run-upin real-estate values, this could make the purchase price a bargainwhen the deal closes several years later. Finally, as the tenant inwhat will become his or her new home, the buyer can be sure it is welltaken care of.

The disadvantages aren't as clear, but they arejust as real nonetheless. Paying above-market rent might be difficult,sometimes impossible, depending on the person's financial situation.And if the would-be buyer can't afford to pay the higher rent and hasto move out early, he or she will lose all the money that had alreadybeen paid as excess rent.

In addition, the whole processusually hinges on the buyer's ability to obtain financing at the end ofthe lease-option period to make the purchase. But if the person'scredit is somewhat tarnished or if he or she doesn't have enough incomeor is faced with a financial emergency, it could be tough to securefinancing in a timely fashion. In such situations, the prospectivebuyer would lose the house and all the money that he or she had alreadyinvested.

Some unscrupulous sellers enter into lease-optiondeals with no intention of completing the sale; they just want tocollect above-market rent. Such being the case, these people try tofind tenants who couldn't possibly keep making the payments. Should thetenant find a way to make the payments anyway, such sellers often tryto make living in the property very uncomfortable after a few years. Insome rare cases, a seller will even claim that the tenant never paidthe extra money that was supposed to become part of the down payment.Under these circumstances, the tenant's only recourse might be going tocourt.

Because of these risks with lease-option deals, buyerstoday often have a better alternative. With properties priced at around$417,000 or less, both Fannie Mae and Freddie Mac offer low-down andno-down financing arrangements. In some cases, buyers can get 103% ofthe purchase price and use the extra money to help with closing costs.

Buyerswho are short on cash and considering lease-option deals should contacta good mortgage broker and find out if they can get preapproved first.Taking this step shows people just how big of a mortgage they canobtain and how small of a down payment they will be able to make. Manybuyers are pleasantly surprised to learn they can buy property withouthaving to enter into a rent-to-own arrangement.