Using a Lease Purchase to Buy Property

Father and son looking at house for sale

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A lease purchase is a written agreement between a landlord and tenant giving the tenant an option to purchase the property at some future point in time. The nature of this type of real estate transaction can vary a great deal because virtually all the terms of a lease purchase are negotiable. For example, they may or may not include a set price. When they do, the price might be the appraised value of the property at the time of purchase or another agreed-upon value.

Lease Purchase Payments

Generally, the seller will want the tenant to give a non-refundable payment in advance to "purchase" the option to later buy the property. This is called an "option" payment and it can be any amount. It "locks in" the tenant's option to purchase even if the landlord later has a change of heart.

Along with the purchase price, the lease agreement sets the size of the down payment and the timetable for making it. The parties can agree to a portion of rents paid going toward this down payment. Of course, this would typically mean an increase in the amount of rent each month. But some buyers might prefer it as a method of forced savings toward a down payment.

Advantages of Lease Purchases for Tenants

There are several reasons why someone might want to lease a home with the option to purchase it later. 

  • He may need some time to resolve credit problems so he can qualify for a traditional mortgage. 
  • He needs time to save up a down payment and he doesn't want to lose the home in the meantime.
  • His lease is already as long as the landlord will agree to and he wants the option to buy rather than have to move again.
  • He has already invested substantially in the property via repairs and improvements. Often, the value of this work can be applied to down payments or against the purchase price.

Advantages of Lease Purchases for Sellers

Lease purchase arrangements can benefit owners of rental properties as well.

  • The up-front option payment can increase the return on investment, and it stays with the owner even if the tenant does not purchase the property. 
  • The owner can lock in a reasonable price for the home in advance. 
  • Offering a lease purchase option can attract responsible tenants interested in long-term occupancy.
  • If the tenant thinks he may end up owning the home, he might be more inclined to keep it in good condition throughout the lease period.

The Bottom Line

If you're a homeowner stuck with a home that isn't selling and you must move for some reason, or if you're a real estate investor with multiple properties, a lease purchase might be a viable option for nailing down a sale and getting a good price for your property. If you've lost a home, have credit problems, or just can't get a down payment together in a short period of time, a lease purchase can work for you as a tenant as well. 

Whichever side of the lease-purchase agreement you're on, the deal can be a win. But since all the aspects of this private deal are up to the individual parties, consider your needs and interests carefully when hammering out the terms.