The Benefits of a Lease Purchase Agreement

Why a Lease Purchase May Be Useful

In the current state of the economy, many people with less than perfect credit can find it difficult to obtain financing for the purchase of a new home due to much stricter lending requirements. Economic hardship also makes it more difficult for potential buyers to acquire the funds needed to have a proper down payment even if they should secure financing.

While this situation makes it much more difficult for people to realize home ownership in a conventional manner, there are other ways for them to acquire a home such as the creative use of a lease purchase.

What Is a Lease Purchase Option?

The lease purchase is becoming a valuable tool for both prospective buyers that don’t have great credit as well as sellers who need to ask more for their homes than the current market trends will realistically allow. Basically, a lease purchase is leasing a home with the option to buy it within a specified period of time and for an agreed upon price.

Upon acceptance of the terms, the tenant pays a non-refundable option fee of 1% to 5% of the agreed-upon purchase price. If the option is exercised, this fee will be credited toward the purchase. The tenant lives in the home and pays monthly rent as well as a rent premium up and above the normal monthly rent. This rent premium is applied toward the purchase price of the home the same way the option fee is once the lease comes to term and the option is exercised.

This method gives prospective buyers the opportunity to get the feel of the home and the neighborhood prior to committing to the purchase. They can discover any shortcomings of the house as well as any troublesome neighbors or other potential issues.

How a Lease Purchase Can Help

The lease purchase also buys time for a potential buyer to repair their credit and save up for a down payment toward a conventional mortgage prior to the expiration of the option. The length of the option can be negotiated and a longer term gives the buyer more time to get things in order. If the option is not exercised at the conclusion of the lease, the buyer loses all rent premiums as well as the option fee paid down at the inception of the lease. While this can be expensive, it is preferable to buying a home that has many problems in an area they do not like.

The lease purchase also has many benefits for the seller. For one, it allows them to ask a higher price for the home because they are selling to someone who otherwise could not qualify for the home. They receive monthly rent that pays down the mortgage while only the rent premium is applied toward the purchase price of the home.

Upon completion of the lease, they have paid down a large portion of their own mortgage and still have a locked-in sale price for the home, even if property values have dropped. If the buyer cannot qualify for a loan or chooses not to complete the purchase, the seller gets to keep the option fee and rent premiums which can be a substantial amount of money.

The lease purchase agreement can be structured and customized in many different ways, so it is important for both the buyer and seller to ensure their interests are protected and the agreement is balanced in neither one's favor prior to signing the contract. Once in effect, it is important for the buyer to completely understand and abide by the terms of the contract.

In some instances, if rent is late by as much as a day, it is grounds for some sellers to terminate the lease and evict the buyer, who then loses their rent premiums and option fees in the process. It is important to understand stipulations such as this and negotiate proper grace periods into the lease purchase agreement before committing to it.

Benefits of a Lease Purchase Agreement

While there are some disadvantages to a lease purchase, the variety of benefits for both the buyer and seller far outweigh them. The buyer gets to live in and eventually purchase the home they want without having to initially come up with a huge down payment or pay high interest rates if they can even qualify for a loan.

The seller gets to sell their home at a higher price while still enjoying all the tax benefits of home ownership and having someone pay down their mortgage at the same time. It is a mutually beneficial arrangement that allows people to continue to better their lives even in a difficult economic climate.

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