Using a Lease Purchase to Buy Property
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 terms of these agreements can vary a great deal. They may or may not include a set price. When they do, the price might be the appraised value at the time of purchase, or another agreed-upon value. Here are a few common questions about this type of real estate transaction.
How Rents Can Apply Toward the Down Payment
They might because all the terms of a lease purchase are negotiable. The parties can agree to a portion of rents paid going toward the down payment, but it isn't required. Of course, this would typically mean the tenant pays more in rent so he may not want this option. But some buyers might prefer it as a method of forced savings toward a down payment.
What Payments Are Required Up Front
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 changes his mind.
What Is 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 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.
- Sometimes very creative deals are made for repairs and improvements made by buyers. The value of this work can be applied to down payments or against the purchase price.
What's in It for Sellers or Landlords
Owners of rental properties might consider lease purchase arrangements to enhance their returns on investment or to help them to sell properties for a good price.
- 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 bring in excellent tenants with long-term occupancy.
- If the tenant thinks he may end up owning the home, he might be more inclined to maintain it in good condition throughout the lease period.
A Lease Purchase Can Be a Good Deal for Both Tenants and Owners
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.
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.
It doesn't matter which side of the lease-purchase agreement you're on. If the concept can help satisfy your housing needs as a buyer or your investment objectives as an owner, it might be something you want to consider.