Lease Purchase - Does Rent to Own Make Sense for You?
What is a lease purchase contract in home buying / selling?
In home buying, a lease to own property has become an important tool to create rental income and find a potential buyer for property that might be sitting on the market for an extended period. Basically, a lease purchase agreement is a lease contract combined with an option agreement which gives the tenant the right to later purchase the property. The rent payments made during the term of the lease typically are applied to the down payment and used to purchase the home or real estate. It's a method of seller financing, often used when the buyer is unable to get credit to obtain a mortgage loan from a commercial lender on his/her own. Lease purchase agreements contain option agreements allowing the renter option to buy the property, for the purchase price stated in the lease purchase contract.
How does a rent to own contract work?
A homeowner will often use a lease with an option to purchase contract to earn income on vacant real property. The landlord and tenant will sign a lease purchase agreement form and the tenant makes monthly rent lease payments similar to a regular lease contract. In some cases, the agreement will begin as an ordinary rental agreement and an option agreement form is added later. Landlord forms offered by USLegalforms can be used by buyers and sellers without the need of a real estate agent.
In a strict lease purchase agreement, the lessee is obligated to buy the property. In a lease with option to purchase contract, the tenant pays for the right to later purchase the property, but isn't obligated to do so. During the option period specified in the lease with purchase contract, the renter can exercise the option to purchase the property and can buy the property by paying the agreed upon sales price. The option money amount a lessee / buyer pays for the option rights, which can be as little as $1, is typically nonrefundable, but often the monthly rent is applied to the purchase of the property. The rent amount the tenant pays to the landlord/seller typically is a bit higher than market rate to account for the fact a portion can be used to later purchase the property. What portion of the monthly rent is applied to the sales price to purchase the home is agreed upon in the lease to own property agreement. The amount of the sales price to buy the property can be a set amount defined in the lease or purchase contract or can be based on market value at the time the option to buy is exercised.
A lease option term can be any duration, often lease options run from one to a few years or more. The lease to buy agreement is usually exclusive, so that no one else has the right to buy the property during the lease term. The lease option contract cannot be assigned to another tenant and the tenant is not under an obligation to purchase the property, and generally just forfeits rent payments if he or she decides not to exercise the option to buy.
What are the advantages of lease purchase agreements?
By creating a lease to buy contract with an option to later purchase the property, it can be one way for a homeowner to get a hard to sell property off the market. There are advantages in not having to go through a real estate agent, and the lease with option arrangement is almost a forced savings plan due to applying rent toward the purchase price. It can be an ideal home buying / selling solution for homes that have been on the market a while or those who can't get financing through a commercial lender. By having the right to later purchase the property, an option to purchase contract allows buyers and sellers flexibility regarding a decision to purchase a home and the homeowner can receive rental income when a house might otherwise sit vacant.
What happens if I decide to not later purchase the property?
The answer depends on whether you have a lease purchase agreement or an option to purchase contract. If you hold an option, there is only a right to purchase the property during the option period, but it's not an obligation to purchase the property. Therefore, if you choose not to exercise the option and purchase the home, you will not be in breach of a lease with option to purchase, and have no further liability.
However, if you have lease purchase contract, you are under an obligation to purchase the real estate, and if you don't complete the terms of the contract, you could be held liable for the remainder owed according to the sales price in the purchase agreement. Monthly rent payments already made will often be applied toward the purchase price.
Why is rent to own so popular in home buying / selling?
Because of the housing market situation, many unsold houses remain unsold for extended periods. By creating a lease with an option to purchase, the homeowner can receive rental income from the monthly rent under the lease contract, and also find a potential buyer, rather than have a home sit vacant. The tenant has an incentive to purchase the property by having lease payments applied to the purchase price. For buyers, it may provide a way they can buy the property even though they have a poor credit rating and don't qualify for financing from a commercial lender, or don't have the required down payment to purchase the home outright.
Is a real estate agent needed for lease purchase agreement?
Sometimes a realtor will show a lease to buy property, but it's not necessary to use a real estate agent for lease to own property. However, it's recommended to conduct due diligence and have a home inspection, title search, provide seller disclosures, etc., and have a lawyer review the lease or purchase contracts involved.
What is the term of the lease with an option agreement?
The term of the rental agreement is typically anywhere from one to three years. A contract with an option to buy can be customized to fit the needs of the landlord and tenant involved. Buyers and sellers are able to negotiate the a lease with purchase agreement in a manner best suited to allow the tenant to later purchase the property.
How does a lease option agreement work?
Lease option agreements consist basically of a rental agreement combined with an option to buy the rental property. Lease options provide the tenant the right to later purchase the property. The tenant pays to the landlord/seller the lease payments for monthly rent, as well as an initial payment of option money that gives the tenant the right to exercise the option during the option period. While the tenant can buy the property for the agreed sales price in the lease with an option, the tenant is not obliged to do so. If the tenant chooses not to exercise the option, then the option money is forfeited, as well as any part of the lease payments that were to be applied toward the purchase price.
Who is responsible for repairs in a lease purchase agreement?
The answer will be a matter of negotiation between the homeowner and tenant / buyer. As in any lease contract, the tenant has a duty to keep the property in good condition, but because the landlord is still the owner of the home, unless otherwise agree, the landlord will remain responsible for any significant repairs needed. In some case, building codes require the homeowner to obtain a permit. The lease purchase contract should contain terms dealing with who will be responsible for repairs to homes in a rent to own situation.
Who is considered the owner in a lease to own contract?
Lease agreements and option agreements do not grant ownership to the renter. Option agreements only grant the right to later purchase the property. In a lease purchase home buying situation, the landlord will remain the homeowner unless and until renters exercise the option to purchase or complete the lease purchase contract by paying the sales price to purchase the home and have the deed transferred into their name.