Lease Purchase Overview
What is a Lease Purchase?
Benefits of Lease Purchase for the Tenant/Buyer
What is the first step?
When Can I Move In?
What is a Lease Option to Purchase?
Owner Financing?
Lease Option Agreements
Comparison of Lease Purchase and Lease Option
Difference Between “For Rent” and “For Lease”
“Rent to Own”
Lease Purchase Overview
Lease Purchases are a very popular way to sell or buy a house these days. What is the difference between homes for lease purchase and homes for lease option. What are the benefits of each?
What is a Lease Purchase?
A Lease Purchase allows you to rent and occupy the home while having a contract to purchase the property for a set amount at a predetermined time in the future. There are two documents involved; a lease or rental agreement, and a purchase contract to buy the property at a later date. Lease purchase agreements vary from transaction to transaction, so there is not one universally standard contract.
Lease Options are similar in that they often lock in the price of the home at the onset of the contract. However, with many Lease Options you have the right to purchase the property by a certain date, but are not obligated to do so. Most often, options money is non refundable in the event you do not purchase the property.
With current forecasts of growing home values, however, it’s not surprising to see Lease Purchases and Lease Options gaining favor today.
Benefits of Lease Purchase for the Tenant/Buyer
Minimum cash may be required up front. Sometimes buyers with credit problems will benefit from this purchase method, since sellers may finance you, OR the method affords you time to repair less-than-stellar credit before you purchase, using a mortgage loan you acquire yourself.
Your home buying power is increased, as you now have the ability to purchase using alternative methods (Lease Purchase or Lease Option).
You have faster equity growth than if you were just renting, and faster than with conventional financing. Some of your rental or option money is working for you towards the purchase. You may have a lower down payment at closing since you will have option money or rental credits to apply. By the time you purchase, prices may have appreciated beyond your locked-in price, giving you additional equity when you eventually sell.
A lease purchase gives you sufficient time to check out all the features and faults of the house. Also, you have time to check out the neighborhood, schools, churches, temples, synagogues, nearby shopping, health care facilities, recreation, and your next door neighbor before you buy the house.
With a lease purchase, you skip paying closing costs, traditional down payment and other fees normally found in a purchase using conventional mortgages.
While you are leasing, you have no taxes or property insurance to pay (the owner does that). Major repairs are normally the owner’s responsibility until you buy the house, at which time YOU become the owner!
Every type of home is available for lease purchase in all price ranges and locations.
What is the first step?
Typically, your first step is to create a timeline. This timeline is for repairing your credit and determining the steps you need to take so that you can purchase your home within 1-2 years. Many owners offering Lease Purchases can work with you on the many options, provide flexible down payments and tailor the transaction to your needs. Many have a can-do attitude and tailor the deal to best suit your needs.
When Can I Move In?
Many lease to own homes are vacant and available now! Once you are approved, you may be in your home within 3-5 days.
Lease Purchase Agreements
A Lease Purchase Agreement is usually two separate agreements between the parties: a Lease Agreement and a Purchase Agreement. The Lease Agreement is a fairly standard rental agreement. The Lease Purchase Agreement is a purchase/sale agreement whereas the tenant/buyer is contracting to purchase the house for a specified price and term. The Lease Purchase shows a definite intent to purchase the property, and sets the terms upon which the sale of the property will occur. This differs from a Lease Option where the tenant/buyer has the right but not obligation to purchase the property.
The value of the home may increase if the Lease Purchase Agreement has a term of many months or years, but the price and other terms are fixed in the purchase agreement. The seller cannot sell the house to anyone else as long as the Lease Purchase Agreement is in force.
The Purchase Agreement should contain all the terms normally found in a Purchase Agreement, including such issues as closing costs, buyer’s inspection rights, what the seller’s disclosure obligations will be, what personal property will be included or excluded from the sale, and what will happen in the event either party does not comply with the contract.
There is no standard lease purchase agreement, so read over the entire agreement and know who you are dealing with. If in doubt, run any forms by your lawyer prior to signing.
What is a Lease Option to Purchase?
Often the biggest obstacle to becoming a homeowner is coming up with enough cash for a down payment. One way for cash-strapped home buyers to realize their dream is to lease a home with an option to buy.
Here’s how a lease option works. The buyer (called an optionee) leases the property from the seller (called an optionor) for a period of time. The lease contract gives the optionee the right to buy the property at the end of the lease period, or earlier by mutual agreement, at a price agreed upon in the contract.
The optionee pays a sum, called option money, to the seller at the beginning of the lease. This money is applied to the purchase price of the home if the option is exercised. The option money is forfeited to the seller if the optionee doesn’t go through with the purchase. The option money is non-refundable.
Like any contract, the terms of a lease option are negotiable. The length of the lease typically can be 12 to 24 months, but anything may be agreed upon. The amount of the option money, the purchase price and the rent amount per month may also be up for negotiation. Sometimes a seller will agree to credit a portion of the rent toward the purchase, providing an additional incentive for the buyer to go through with the purchase. One thing is certain: during the lease period, the seller cannot sell the property to another buyer!
Even though the amount of the option money is negotiable, it’s usually less than the down payment amount required to purchase the property following conventional practices. So for relatively little cash up front, a lease option allows the buyer to tie up a property at today’s prices, and live in it before making a decision to purchase. If you’re buying in a market where home prices are rising, a lease option might be a wise choice because you set the purchase price up front.
There are two parts to a lease option agreement. The first deals with the terms of the lease (rent), and looks like a standard lease agreement. The second deals with the terms of the purchase and looks like a normal purchase agreement.
Home buyers who have a house to sell in another location may be able to lease option a home to give them a place to live and time to sell their home. Then they are able to use their equity from the sale to purchase the home they are renting at an agreed price.
NOTE: Since you forfeit your option money if you don’t go through with the purchase, don’t option a property that you have no intention of buying.
Owner Financing?
Owner financing, simply stated, is a seller willing to help a buyer by financing part or all of the purchase price. Usually, the buyer makes a down payment and the seller will carry a first mortgage, second mortgage or an Agreement for Deed (also called a Land Contract).
Lease Option Agreements
A Lease Option agreement is usually two separate agreements between the parties: a Lease and an Option Agreement. The Lease Agreement is a fairly standard rental agreement. The Option Agreement is a purchase/sale agreement whereas the tenant/buyer has the exclusive right to purchase the house for a specified price and term. The price of the home may increase if the Option Agreement has a term of many months or years. The seller cannot sell the house to anyone else as long as the Option Agreement is present.
The tenant/buyer leases the house for a specific monthly rent and term. Part of the rent may or may not be applied to the purchase price. The Earnest Money Deposit (also called an option fee), price and terms of the sale are negotiated in the Option Agreement.
The Lease Agreement usually has a default clause. If the tenant/buyer does not pay the rent as agreed in the Lease Agreement, the Option Agreement is null and void, and the Earnest Money Deposit is forfeited by the tenant/buyer.
Lease Option arrangements work very well for buyers needing to improve their credit. The tenant/buyer can find a home they wish to purchase, move in, enroll their children in school and enjoy the home while rebuilding their credit. The on-time rental payments will help build the tenant/buyer’s credit rating. Coaching and mentoring the tenant/buyer on methods to improve their credit is of great benefit to the Tenant/buyer, and helps to prepare for the responsibilities of home ownership.
Many lenders consider the execution of the Option Agreement as a refinance loan instead of a purchase loan. A refinance loan usually has more liberal underwriting criterion than a purchase loan. Therefore, refinance loans are easier to qualify. Also, increased equity may be considered in the loan to value calculation.
Some lenders recommend that sellers lease option a home to a tenant/buyer before carrying a mortgage for the buyer. This way the seller will have a payment history with the buyer, and proof of the buyer’s ability to handle financial responsibility. Foreclosure of a mortgage is a much more difficult and lengthy process than an eviction on a lease agreement.
Comparison of Lease Purchase and Lease Option
With both the Lease Purchase and Lease Option, you have two agreements: a lease and either a Purchase Agreement or a Lease Option Agreement.
The main difference is that with a Lease Option, you have the legal right to purchase the property for a fixed period of time, but are not required to purchase the property. With a Lease Purchase, you have a definite Purchase Agreement stating that you will buy the property for a certain price and terms by a certain date. You are more locked into the transaction with a Lease Purchase.
Difference Between “For Rent” and “For Lease”
These terms are practically the same. You would sign a lease agreement for your protection in renting a house. So “For Lease” and “For Rent” are the same. Technically, you could rent a property without signing a lease, but that would not be wise. When you have a lease, you are renting the property.
“Rent to Own”
Sometimes you will hear that the status of a house is “Rent to Own.” That generally refers to a house that is available for a lease purchase, as described above.
