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Lease Purchase Explained

Updated: August 11, 2023
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What is a Lease Purchase?

A lease purchase is a formal contract between a renter and a seller that combines the elements of a right of first refusal and a rental contract into one. These agreements are common among the lease-to-own community since they offer the benefits of renting combined with the promise that the tenant will be the first one eligible to put in an offer when the property goes up for sale.

Lease purchase agreements define a certain lease period in which a potential buyer has the right to occupy a property. Lease periods are determined at the time the contract is signed and can serve to give either party time to get their affairs in order, or sometimes even allows the buyer to gain some equity in the property before purchasing it.

How a Lease Purchase Works

Lease purchase agreements are a great tool for buyers and sellers to use to facilitate the sale of a property before it goes on the market. Although the process might seem intimidating, the reality is that it’s easy to understand.

Lease purchase agreements serve to allow tenant-buyers and sellers time to prepare for the sale of a property. They can be utilized by buyers to secure a property while they work on their credit score, save money, or get other affairs in order. Buyers find them helpful to secure the sale of a property to an interested party who might not otherwise qualify due to their inability to qualify for a mortgage note.

Lease purchase agreements consist of two separate real estate contracts : a rental agreement and a contract for sale.

The rental agreement includes provisions such as:

  • Monthly rent and due dates
  • Who is responsible for the maintenance of the property
  • Deposit requirements
  • Pet regulations

The contract for sale, on the other hand, covers the following:

  • Parties involved in the sale
  • Property selling price
  • Down payment requirements
  • Payment methods

Lease purchase agreements also include cross-default provisions which serve to protect both parties to a contract. These provisions entail that if the rental agreement is violated, the contract for sale is, and vice-versa.

Check out this article to learn more about how lease purchase agreements work.

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How to Structure a Lease Purchase

Whether you’re creating a lease purchase agreement or entering one, it’s important to know how to structure it. Organizing the document properly ensures the enforceability of the real estate purchase agreement and lease purchase agreement.

Here is a breakdown of how to structure a lease purchase agreement:

Step One: Determine Lease Agreement Length

One of the most important aspects of a lease agreement is how long it will last. Whether you need to allow time to lower a debt-to-income ratio or address negative items on a credit report, the amount of time allowed must be clearly defined. Lease agreements should never exceed one year.

Step Two: Consider a Security Deposit

Security deposits help to protect against any damage done to property while a tenant occupies it. Requiring a security deposit ensures that if the lease agreement falls through and repairs are needed beyond normal wear and tear, the costs are covered.

Step Three: Tax and Insurance Responsibility

The seller should maintain the responsibility to pay any insurance and taxes on the property for the duration of the lease purchase agreement. This way, sellers can ensure that all costs associated with the property are paid until the sale takes place. Costs can be recuperated for these items by including an extra cost in the monthly rent to cover them.

Step Four: Include Rent Credit Details

During the time a buyer-tenant resides in the home before purchasing it, sellers can apply a portion of the monthly rent toward equity in the home. It’s important to make sure the lease agreement explicitly states how much of the rent goes toward equity each month.

Step Five: Address Miscellaneous Terms

Any miscellaneous terms of the contract such as home improvement requirements, option price, and fair market value should be included in the lease purchase agreement. This solidifies the contract’s completeness and further protects both parties of the agreement.

Here is an article where you can learn more about how to structure a lease purchase agreement.

What’s the Difference Between a Lease Purchase and a Lease Option?

Even though lease purchases and lease options sound similar, they are not the same thing. Understanding the differences between these agreements will empower you to make the best decision for your future. After all, purchasing a home is one of the biggest commitments you will make in your lifetime.

Here is an overview of lease purchases and lease options and how they are different:

Lease Purchase

A lease purchase entails that at the end of the designated leasing period, the buyer-tenant intends to purchase the rental property. This means that once the first portion of the agreement, the rental agreement, concludes, the buyer-tenant and the seller immediately migrate to the second contract, the purchase agreement. The sale is a sure thing, as long as none of the terms of either agreement is violated.

Lease Option

A lease option is like a lease purchase since it also consists of two contracts. The first contract, the rental agreement, is identical to that of a lease purchase. However, the second is called an option agreement. Option agreements entail that the buyer-tenant has a choice to purchase the property once the rental agreement period concludes after paying an option fee. With a lease option agreement, the buyer-tenant is not obligated to purchase the property; this is the most significant difference between the two.

Get more information about the differences between a lease purchase and a lease option by reading this article .

Lease Purchase Agreements

Lease purchase agreements are handy tools that non-qualified buyers can use to “lock in” property before it goes up for sale to the public. During the period of the rental agreement, buyer-tenants can take time to get personal affairs in order, reduce their debt-to-income ratio, and even obtain equity in the property in which they reside.

Lease purchase agreements are legally binding contracts that obligate buyer-tenants to purchase the property at the end of their rental agreement, which should last no more than one year.

Ultimately, choosing to go into a lease purchase agreement with a seller is a great way to secure your dream property even if you aren’t financially ready to qualify for a mortgage note on it. If you don’t want to wait before securing a new home for you and your family, this path to homeownership is one of the best legally sound ways to do it.

See an example of a lease purchase agreement by viewing this webpage .

Get Help with a Lease Purchase

If you need help with a lease purchase agreement, real estate lawyers can help. Whether you need to draft a new contract, modify an existing one, or want to talk to someone who knows the ins and outs of these contracts, you need a professional on your side.

Post a project on ContractsCounsel today to get in touch with experienced real estate lawyers who specialize in lease purchase agreements and are ready to give you the assistance you need today.

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