What is a Lease Purchase?
A tenant and landlord enter into a written agreement that, at some point in the future, the tenant has an option to purchase the home they are renting. The terms of the agreement can vary a lot, with or without a set price at the time the option is exercised. The agreement could set the price at the appraised value at the time of the purchase, or another agreed-upon valuation method.
Do Rents Apply Toward the Down Payment?:
With all of the terms of the lease purchase being negotiable, this one also isn't set in stone. The parties can agree to a portion of rents going toward the down payment, but it isn't required. Of course, this would mean a higher rent amount, so the tenant may not want this option any more than the landlord. Some buyers might want it as a method of forced savings for down payments.
Are There Up-front Payments Required?:
Generally, the seller will want the tenant to give them a non-refundable payment to "purchase" the option to buy the property at the specified time. This is the "option" payment, and can be any amount. It is also payment to the owner for "locking in" the tenant's option to purchase, even if the landlord later wishes they hadn't.
What's Good About a Lease Purchase for Tenant Buyers?:
There are several reasons why someone might want to lease a home with the option to purchase:
- They need time to resolve credit problems, and want the home.
- They want the home but need to build up a down payment.
- They are in as long a lease as the landlord will give them, and want the option to buy rather than move again.
Sometimes very creative deals are made for repairs and improvements made by buyers and for applying them to down payments or against the purchase price.
On the Other Side – What's In It for Sellers or Landlords?:
Owners of rent properties should consider lease purchase arrangements if they enhance the return on investment or help them to sell the property when they want at a good price.
- The up-front option payment increases the return on investment and stays with the owner even if the tenant does not purchase.
- The owner can lock in a reasonable price for the home in the time frame they want.
- The lease purchase option can bring in excellent tenants with long term occupancy.
- If the tenant thinks they may end up owning the home, they will normally keep it in better condition throughout the lease period.
Lease Purchase Can Be Good for Both the Tenant and the Owner:
Whether you're a homeowner who is stuck with a home that isn't selling and you must move for your job, or you are a real estate investor with multiple properties, lease purchase is a viable option for many.
If you have lost a home, have other credit problems, or just can't get a down payment together in a short period of time, lease purchase can work for you as well. Or, perhaps you want to be sure that a new job or area is really right for you, and believe it unwise to jump into a home purchase.
It doesn't matter which side of the lease purchase you're on, if the concept can help to satisfy your housing needs as a buyer or your investment objectives as an owner, then it should be something you want to consider.