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.
Learn more about how lease purchase payments work and the advantages they have for both tenants and sellers.
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 and Sellers
|Advantages for Tenants||Advantages for Sellers|
|Time to qualify for a mortgage||Increased return on investment|
|Time to save for a down payment||Locked-in sale price|
|Don't have to move when lease ends||Attracts responsible tenants|
|Personal investment||Keeps home in good condition|
Advantages of Lease Purchases for Tenants Explained
There are several reasons why someone might want to lease a home with the option to purchase it later.
- Time to qualify for a mortgage: They may need some time to resolve credit problems so they can qualify for a traditional mortgage.
- Time to save for a down payment: They may need time to save up a down payment, and they don't want to lose the home in the meantime.
- Don't have to move when the lease ends: Their lease is already as long as the landlord will agree to, and they want the option to buy rather than have to move again.
- Personal investment: They have 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.
In each of these cases, having the option to purchase at the end of the lease helps ensure a smooth transition from tenant to new owner. And if the tenant decides they don't want to purchase the property at the end of their lease, that is OK, too.
Advantages of Lease Purchases for Sellers Explained
Lease purchase arrangements can benefit owners of rental properties as well.
- Increased return on investment: The upfront option payment can increase the return on investment, and it stays with the owner even if the tenant does not purchase the property.
- Locked-in sale price: The owner can lock in a reasonable price for the home in advance.
- Attracts responsible tenants: Offering a lease purchase option can attract responsible tenants who are interested in long-term occupancy.
- Keeps home in good condition: If the tenant thinks they may end up owning the home, they might be more inclined to keep it in good condition throughout the lease period.
If you're a landlord, a lease purchase agreement can help ease some of the most common concerns about owning a property: finding great tenants, keeping the home in good condition, and eventually selling the home for a price you're happy with.
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.
- 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.
- If you're a tenant, having the option to purchase at the end of the lease helps to ensure a smooth transition from tenant to new owner.
- If you're a landlord, a lease purchase agreement can help ease some of the most common concerns about owning a property.