Real Estate Lease Purchase Options

Many home buyers who are struggling to get mortgages are finding comfort in lease purchase options. This is a contract that allows renters to lease the property and, at the end of their lease, have the option to buy the home. Options to purchase, lease options and lease purchase agreements are three different financing solutions.

Options To Purchase

Buyer pays a seller option fee for the right to later purchase the home. The option money is typically 1-5% of the purchase price.

Buyer and seller may agree to a purchase price now or the buyer may agree to pay market value at the time the purchase option is exercised. Most buyers choose to lock in the future purchase price in hope of gaining equity appreciation.

The term of the purchase option is negotiable, but the common length is generally from one year to three years.

Option money is typically applied to the down payment but, is rarely refundable.

Nobody else can buy the property during the option period.

The buyer can sell the option to somebody else. If the buyer does not exercise the option and purchase the property at the end of the option, the option expires.

The buyer is not obligated to buy the property and nobody else can buy the property during the purchase option period.

Lease Purchase Option

Buyer pays the seller option money for the right to later purchase the home. The lease option money may be minimal or substantial.

Buyer and seller may agree to a sales price now or the buyer may agree to pay market value at the time the option is exercised. It is negotiable. However, most buyers want to lock in the future purchase price upon inception of the lease purchase option.

The term of the lease option agreement is negotiable, but the common length is generally from one year to three years. Buyer and seller agree to a predetermined rental amount which is typically above market rents.

A portion of the monthly rental payment and the option money typically apply toward the purchase price. Option money is rarely refundable.

The buyer generally cannot assign the lease option without seller approval. Nobody else can buy the property during the lease option period If the buyer does not exercise the lease option and purchase the property at the end of the lease option, the option expires. The buyer is not obligated to buy the property.

Lease Purchase Agreement

Buyer pays the seller option money for the right to later purchase the property. Buyer and seller agree on a purchase price and rental amount, often a bit higher than market value.

The term of the lease purchase agreement is negotiable, but the common length is generally from one year to three years, at which time the buyer applies for bank financing and purchases the home.

A portion of the monthly rental payment and the option money typically apply toward the purchase price, but the option is rarely refundable.

The buyer is obligated to buy the property and typically cannot assign the lease purchase agreement without seller approval. Nobody else can buy the property unless the buyer defaults.

Buyers are often responsible for maintaining the property and paying all expenses associated with its upkeep, including taxes and insurance.

Lease Purchase Benefits for Sellers and Buyers

Lease purchase with option agreements are commonly offered by sellers when it's a buyer market. Sellers generally get top sales price, even if demand is low. Leasing tenants who have a vested interest in a home, think like homeowners and tend to take good care of it.

Buyers generally make a small down payment, with little or no qualifying, making a lease purchase an attractive way to ease into the benefits of home ownership. Although the lease payments may exceed market rent, the buyer is building a down payment and hoping that the property will appreciate beyond the purchase price.

Lease Option and Lease Purchase Considerations

Obtain all the disclosures and do your due diligence just like you would on a regular sale;

Hire a real estate lawyer.
Get a home inspection.
Examine the title policy.
Obtain an appraisal.
Read seller disclosures.
Consider a roof certification, pest inspection, and home warranty plan.

Courtesy of: California Mortgage Rates