Overview:
Rent-to-own contracts help prospective first-time home buyers build their credit scores or save for a down payment. Lease purchase agreements are the most legally binding of these options.
What Is A Lease Purchase Agreement?
A lease purchase agreement is a rent-to-own contract where the tenant agrees to buy the property at a later date. The renter pays an upfront option fee for the exclusive right to buy the property, with a portion of the monthly rent often going toward a down payment. If the renter can't secure a mortgage at the end of the lease, they forfeit the purchase option.
Lease Option vs. Lease Purchase:
Both lease option and lease purchase agreements involve a nonrefundable option fee and prevent the landlord from selling to others during the lease term. However, a lease option only obligates the seller to sell, while a lease purchase binds both parties to the sale.
Structuring A Lease Purchase Agreement:
Set The Lease Period: Define the lease term and monthly rent, typically up to 3 years.
Include Special Clauses: Cover maintenance costs, property taxes, insurance fees, option fee amount, purchase price, and down payment allocation.
Allocate Rent To Down Payment: Specify the portion of rent contributing to the down payment.
Contract Of Sale: Agree on a purchase price at the start, regardless of market fluctuations.
Professional Review: Have a real estate attorney review the agreement before signing.
Benefits For Buyers:
Down Payment: Save for a down payment while paying rent.
Convenience: Avoid moving by buying the current rental home.
Credit Score: Improve credit score to qualify for a mortgage.
Home Equity: Build equity if the property's value increases.
Benefits For Owners:
Upfront Payment: Keep the option fee even if the buyer defaults.
Attract Tenants: Appeal to responsible renters.
Default Benefit: Retain the down payment if the tenant defaults.
Locked-In Price: Set the purchase price in advance.
Simplified Selling: Avoid traditional sales processes.
The Bottom Line:
Lease purchase agreements can benefit both property owners and renters. Treat them as seriously as a home purchase and seek legal advice. For more information, apply online or call us at (949) 226-7474.
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