Why breaking a lease to buy a house is a good idea

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Buying a home should be an exciting time in your life. After all, owning your first home is a big milestone. However, there’s something that could get in the way of your plans: your current lease agreement. If you’re looking to move to a new home before your lease expires, there are some steps you can take to ensure that everything goes smoothly.

Here is everything you need to know before you decide to break your lease early. I’ll take you through the pros and cons, when it is reasonable to move houses ahead of your lease term, and how you can break a lease without running into too much trouble with your landlord.

Pros of breaking a lease to buy a house

When talking about breaking your lease agreement, your mind will most likely head to the disadvantages right away. However, breaking a lease early to purchase a home isn’t all that bad. There are also many pros to breaking your rental agreement.

Long-term savings 

I’ve said this in many posts, and I’ll say it again. Time in the market is more important than timing the market. The rent you pay towards your one year lease while waiting for it to expire could have been your down payment or closing costs for your own property. Instead, it’s going towards building your landlord’s equity.

You also have to consider that mortgage payments aren’t forever like rent — the earlier you buy a home, the sooner you can live payment free with 100% equity in your own home once your mortgage is paid off. And if you can pay just a little extra towards your principle each year, you can save a lot in interest.

Achieve financial equity

One of the best ways to better your financial situation is to own a house instead of continuing to stay at a rental property. Every month that you pay towards your mortgage, you are building equity as a property owner. When you pay rent every month with your hard-earned money, you’re left with no equity by the end of the lease term.

Being a property owner is also an investment. As the housing market appreciates, you also benefit from this increase in value. You can choose to sell your home for a profit in the future or you can refinance to get a better interest rate and pay less in the long run. And don’t forget about the tax incentives of owning a home, such as the mortgage interest deduction.

If at any point you need to move but don’t want to sell your property, as a property owner, you can instead generate extra income by renting out the home. You can even use this rental income towards a mortgage on a new home. With all the benefits and options of being a property owner instead of a tenant, you’ll get higher ROIs in the long run.

Finding your dream home

When renting, your property manager dictates what upgrades and repairs are needed on the property. When you own a home, you can make minor upgrades like lighting fixtures or new appliances. You can also make big renovations to any area of your home, such as the kitchen and the bathroom. And if you outgrow your space in a few years, you can choose to build an extension.

Being a property owner gives you the flexibility to improve your space as your life changes; this reason alone is why many people take the risk of breaking an apartment lease, even at the cost of an early termination fee.

The risks of waiting out your lease agreement

There are many reasons why waiting to buy a home could cost you more, but the majority revolve around the uncertainty of the future. Here are just a few risks of waiting:

Housing market changes

The housing market works in cycles, but 50-year charts have shown that the overall trend is that home values are always increasing. Home appreciation in a normal real estate market is between 3% and 7%. If you wait just a year, you could end up paying more for a comparable home.

Interest rates

In the past three months, we have seen interest rates almost double. This seems like a huge jump, but comparing today’s increased rates to historical rates, they are actually still considered low. Even if home prices decrease a year from now, if your interest rate goes up a fraction of a percentage, you could end up spending more for your home in the long run.

Housing availability

If you found a perfect home today, but you’re considering waiting to buy until your lease ends, keep in mind that there is no guarantee that your dream home is going to be available one year from now within the right price range, neighborhood, and with a favorable mortgage interest rate.

And even if the perfect home does exist a year from now, there is no guarantee that the seller can move by your lease end date. You may end up running into a similar timing problem as your lease renewal date approaches.

Cons of breaking a lease to buy a house

Your lease agreement is a legally binding contract, but keep in mind, all the cons of breaking a lease early can be avoided by communicating your plans with your landlord.

If you choose to buy a home and move before your lease expires without getting approval from your landlord, then you could find yourself in hot water. Here are some of the worst-case scenarios below, just so you know what you need to prepare for.

Your landlord may require you to pay out your lease term

Landlords and property managers are bound to protest if you want to break your lease early, especially if you’re trying to move out without settling your outstanding rent. If it’s legal in your area, your security deposit could be used to cover the outstanding rent, but that may not cover all of their losses.

If your property manager or landlord refuses to allow you to move out without settling the remaining months of your rental agreement, and you decide to move and just stop paying, your landlord could to sue you for breaking your lease early. And in an extreme worst-case scenario, the credit bureaus may be notified and a debt collection agency may be assigned to collect the entire lease worth stated in your agreement. 

How to break a lease early

If you want to break your lease without ending things on a bad note with your landlord, then you can try using some of these methods to end your original lease in good faith with your former landlord.

Home buying clause

Before you go house hunting, you should first check your lease agreement for any clauses that allow you to legally break the lease. In some agreements or contracts with your landlord or property manager, a home buying clause may excuse you from paying rent if you’re breaking a lease to purchase a home. Such a clause permits tenants to leave the property ahead of the set timeframe on the lease; all you need to do is get your landlord’s permission by submitting a notice ahead of time.

Give your landlord a heads up

Breaking the lease involves communication. You need to talk to your landlord or property manager to give them notice you want to break the lease early. In some cases, talking to the seller or management company of your new home might also benefit you if they offer to credit you for the costs of breaking your lease.

On Long Island, the time between signing a contract to purchase a home and closing is about 30 to 45 days, not including the time it takes to look for the house. So, for good measure, start looking for a new home with about three to six months left on your lease and give your landlord notice of your plan. You can also agree not to stop paying rent until they have a new tenant for the property, and you can allow the property to be shown to prospective tenants while you are looking to purchase a home.

This gives you and your landlord enough time to sort out the details of your new home and your replacement tenant. If you live in an area with high demand for rental properties, it should be easy to find a replacement.

Opt-out of a one year lease

If you switch to a month-to-month lease instead of a year lease, then it could grant you more freedom to move without any trouble. Most one-year leases revert to month-to-month after the first year lease period, but it isn’t always the case. If you’re about to sign a new lease but know you’ll be looking to buy within the year, see if this is a term in your lease or ask your property manager to add it.

Unlike most states, New York state uses the language “on or about” in the purchase contract for property closing dates. This gives flexibility to the buyer and seller to close within a window of 60 days (30 days before or 30 days after the agreed upon date). If you switch to a month-to-month lease, you can use the flexibility of your closing date to make it line up nicely with the end of your lease.

Pay to break the lease

Some leases include an early termination fee, which allows tenants to move out early for a price. Lease breaking through this method may not be the cheapest option in the short-term, but it is one of the fastest. Your landlord will most likely let you go as long as you give them the money you owe before moving out. Despite this, it’s still common courtesy to let your landlord know ahead of time by giving them notice.

Re-renting the property

Landlords in most states are obligated to re-rent an apartment and find a replacement tenant to occupy the vacant property once the previous tenant ends the lease agreement prematurely. This limits how long a landlord can charge rent to a previous tenant after a broken lease. Once they find a replacement tenant, then breaking the lease should be allowed without a penalty, based on the Housing Stability and Tenant Protection Act of 2019.

Though you may not be on the hook for the entire remainder of your lease, you can minimize your costs and any contention with your landlord by giving the landlord ample notice that you are planning to move out early, and allow showings of the property to new prospective tenants.

Conclusion

Whether you’re on a yearly or monthly agreement, breaking your lease takes clear communication with your property manager or landlord before you sign a contract to buy a home. If your landlord or property manager is not amenable to any of the above suggestions, then you can ask the seller to push back the closing date closer to your lease end date. And if that doesn’t work, then you may be stuck paying the remaining months rent.

If you’re planning on buying a home on Long Island, give me a call or contact me to find out stress free ways you can break your lease.

Author

Cristina Morizio

Long Island real estate agent Cristina Morizo
As an experienced REALTOR® and Long Island native, I know the ins and outs of the real estate market. I help home buyers, sellers, investors and homeowners navigate and negotiate. Questions? Ready to buy or sell? Let’s talk!

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