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What is a Lease Purchase Agreement?
A lease purchase agreement is a rent-to-own legal contract used between a tenant and a landlord. A rent-to-own contract allows buyers to rent for a few years before purchasing the real property from the seller. In a lease purchase agreement, the renter may or may not pay an option fee, which is an agreed-upon purchase price to gain exclusive rights to buy the property.
How Do Lease Purchase Agreements Work?
Lease purchase agreements work on a rent-to-own model. Renting-to-own means that the prospective buyer rents the property and progresses towards eventually owning it. A rent-to-own property generally has a higher rent than the fair market price. This extra portion of the rent goes towards the down-payment on the home. This down-payment can be used to buy the home at the end of the lease agreement .
For example, if you rent a home for $1500 out of which $300 goes towards the down payment, you will have $7200 saved at the end of 24 months of renting. If the house is worth $200,000, you will have 3.6% down payment ready.
A lease purchase agreement consists of two contracts:
- Residential Lease: The residential lease agreement provides the lease of the property between the landlord and the tenant for the specified term.
- Contract for sale: The contract for sale obligates each party to terms of the residential purchase agreement upon completion of the lease term.
A lease purchase agreement also contains cross-default provisions ensuring that the breach of one contract will automatically result in the breach of another.
Would you like to know more about lease purchase agreements? Here is an article for you .
Pros and Cons of Lease Purchase Agreements
Lease purchase contracts come with certain advantages and disadvantages for both the buyer and the seller. Here are some of them:
Pros of a Lease Purchase Agreement
- Renting-to-own can be a way for the buyer to save money for down payment. Saving in addition to the rent credits can also help the tenant in avoiding private mortgage insurance.
- Lease purchases can provide a test-drive for unsure buyers. For tenants who are unsure about where they want to live, a rent-to-own agreement can give them the option to live in a place to try it out before buying a property there.
- Rent-to-own agreements usually split maintenance responsibilities between the tenant and the landlord, making it easier for the tenant.
- Lease purchase agreements provide time to build up credit scores and save on money to buy the home.
- Lease purchase agreements also works for tenants who are unsure about where they want to live.
Cons of a Lease Purchase Agreement
- If the tenant chooses not to buy the house after the lease period, the rent paid towards the down-payment is forfeited.
- Tenant cannot recover the option fee if they choose not to buy the home after renting.
- Tenant will lose their right to the home if they cannot qualify for a loan at the end of the lease period.
- Rent-to-own agreements might not work for individuals who are renting because their low credit score is preventing them from getting a mortgage and they have no plans for improving their score.
- If tenants under a rent-to-own agreement are late on their rent frequently, it can make them lose their monthly rent credit.
- Rent-to-own agreements can be risky for individuals who aren’t sure if they can get a loan. Bankruptcies, foreclosures and repossessions can harm your credit score and prevent you from qualifying for a loan.
Here is more on benefits of a lease purchase agreement.
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Difference Between Lease Option and Lease Purchase
There are two types of rent-to-own agreements – lease option and lease purchase. Both types of agreements allow the tenant to buy the property after renting. However, there are some key differences to explore.
A lease option provides the tenant the option to purchase the property after renting. This is provided to the tenant in exchange for the option fee. Most option fees are around 2% - 7% of the total price of the home. In most cases, the option fees apply to the final purchase price of the property, thus reducing the price. While the tenant can choose not to buy the property at the end of the lease term, under a lease option agreement, the tenant’s option fee and rent credits will be forfeited.
In a lease purchase agreement, the tenant enters an obligation to buy the home at the end of the lease. The buyer and seller can set the purchase price before entering into the contract. This gives the tenant an idea of the loan amount needed before buying the property. In the case where the tenant cannot acquire funds to buy the home, they will lose the claim to the home and all accumulated rent credits. There is also a danger of being sued for breach of contract by the homeowner if the tenant doesn’t buy the property.
Here is an article on lease option agreements.
Are Lease Purchases a Good Idea?
Are you wondering if a lease purchase is a good idea for you? It depends on the real estate market. Since real estate market prices are rising, locking down a purchase price can help the tenant build equity and have security. If the price depreciates, the tenant can also pay for the option to have the home appraised before buying to secure a fair price.
Lease purchase agreements can really work for buyers who need more time to either decide on the property, try out a new place before buying or are looking to save more before buying a home.
If you would like to read more before making a decision, here is an article for you .
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