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Lease with Option to Purchase basics

Lease with Option to Purchase Agreements, also called Lease to Own Agreements, allow renters who are working on improving their credit to move into a home they will have the option to buy at the end of the lease term. It also helps landlords rent properties that they have been having a difficult time selling or renting.

Use the Lease with Option to Purchase document if:

  • You are a property owner willing to sell a property to the renter when the lease expires.
  • You are a renter preparing the document to share with your landlord.

Lease to Own Contracts include everything a standard lease usually includes plus the terms of the option to buy agreement. There are unique advantages for both parties in this type of lease arrangement. However, since the terms are often rather long, usually two years or more, and the monthly rent rate is usually more than the going rental rate, it is a good idea to have the contracts reviewed by an experienced real estate lawyer.

Other names for this document:

Lease with Purchase Option, Lease with Option to Buy, Lease Purchase, Lease to Own Contract, Lease-Option Agreement

What is included in a Lease with Option Purchase Agreement?

These contracts include everything a regular lease does plus the amount of the option fee, termination details, what happens to extra rent paid, and whether the house will have a set price or be sold at market value.

  • Option fee
    This fee is usually one to five percent of the price of the home. In most contracts, this fee is to reserve your “option” to buy the property and may go towards your down payment or equity.
  • Additional rent
    Most contracts set the rent rate two or three hundred dollars higher per month than the going rate. So, if a home usually rents for $1200, the rent might be set at $1500. The extra $300 is put towards the down payment or treated as “equity” and taken off the price of the home.
  • Termination
    This portion of the contract is extremely important for both parties. It details how a renter might violate their lease, how a renter can quit the lease and the landlord obligations.
  • Home sale price
    Some sellers and buyers agree on what the sale price will be when making the agreement. It could be current market value or the projected value. Some choose not to set the price until the time the actual purchase is to take place.

Can landlords spend the option fee and extra rent?

It depends on the agreement. Some contracts dictate that the fees and extra rent will be put into an escrow account and used towards the down payment when the sale takes place. Others can do as they wish with the money, but they agree to reduce the price of the home by that amount when they sell the house.

What if the potential buyer chooses not to purchase?

It is important to understand the details of your specific contract, so you should ask a lawyer to review your agreement before signing. Generally speaking, the Lease-Option Contract wouldn't force the buyer to purchase, plus the buyer still has to be able to quality for financing. Either way, if they back out, the option fee and extra rent paid would most likely be lost and would go to the property owner.

Lease to Own: Advantages and disadvantages for buyers and sellers

In most situations, most of the advantages are on the seller's side. However, there are still some advantages for the potential home buyer.

Advantages for the seller:

In a down market, it can be a good opportunity to increase cash flow from leasing a property that was otherwise vacant or difficult to sell or rent. Most lease agreements are long-term, and the rental rate is often higher than average, so this can be an advantageous arrangement for property owners.

Advantages for the buyer:

It can give the buyer a couple of years to work on improving their credit and increasing their down payment leverage. If the Lease Option to Purchase Agreement includes the selling price of the house, the price is locked in even if the market improves.

Disadvantages for the seller:

You can't sell the house if the market improves and you are still within the terms of the lease agreement. If the contract includes the sales price, you cannot raise the price. If the buyer backs out and doesn't improve their credit, you are left with a vacant rental.

Disadvantages for the buyer:

If your credit score doesn't improve, you could lose the option fee and the years of extra rent paid. Alternatively, something may happen that is out of your control which could affect your ability to buy such as job loss or a serious illness.

Things that could go wrong

Lease with Option to Purchase Agreements are made with the idea that both parties will fulfill their side of the contract. However, sometimes lease arrangements run into problems.

To protect your interests, here are a few potential issues that you should be aware of:

  • Property owner doesn't pay their mortgage or taxes and could lose the property.
  • Renter doesn't maintain the property well.
  • Eager buyers get duped by a lease to purchase scam.
  • While living in the property, renter finds flaws in the home that make them want to back out.
  • Contract is terminated if rent is paid late and the renters lose their investment.
  • Sellers might try to sabotage the agreement, so they can sell their property for a higher amount.

Lease to Option to Purchase Agreements should be carefully reviewed before signing. They are expensive, long-term agreements, so it warrants diligent review. If everything goes well, renters can build their credit while the seller can benefit from two or three years of rental income during the lease period. At the end of the contract, in a best-case scenario, the seller sells a hard-to-sell property and the new owners get to enjoy the benefits of homeownership. If you are considering entering into a Lease-Option arrangement, it is important to talk to a lawyer.

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