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Lease with Option to Purchase basics

Lease to Own Agreements, sometimes called Lease with Option to Purchase Agreements or Lease to Purchase, are attractive options for renters who do not have the ability to purchase a home with a typical mortgage. In some cases, the difficulty is due to less than perfect credit or the need for a large down payment. Lease to Own Agreements may also be a favorable option for landlords who are struggling to find renters or buyers for a specific property.

Is a Lease to Purchase a good idea?

A Lease to Purchase can be a good option for renters who face obstacles to buying property, but 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.

In addition to these factors, there are other things that can go wrong with these lease-option agreements. 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 with 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.

How do you do a Lease to Purchase Agreement?

Rocket Lawyer offers a free Lease with Option to Purchase Agreement to use 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.

Simply answer a few questions and your document will be ready to use.

What is included in a Lease with Option to 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.

What is the difference between Lease Option and Lease Purchase?

A Lease Option may give the potential buyer the right to buy the property based on the terms of the agreement. A Lease Purchase may require the buyer purchase the property based on the agreed-upon terms of the Lease-Purchase agreement.

How do you Lease to Own a home?

The first step in leasing-to-own a home is determining whether your landlord is interested in the arrangement. Once the details have been discussed, the Lease with Option to Purchase Agreement can be used to set your lease-to-own purchase agreement in a signed document.

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Sample Lease with Option to Purchase

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