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Lease Purchase Option Agreement

A lease purchase option agreement can be beneficial for property owners and buyers. In today's real estate market it has become difficult to attract qualified buyers to purchase homes at market value. It has also become difficult for buyers to qualify for home mortgage financing. Lease options can be the solution both parties are seeking.

A lease purchase option agreement allows buyers to rent the property while building or restoring their credit rating. A portion of rent is contributed toward the purchase price which reduces the amount of funds required when buyers later obtain financing.

There are three ways lease options can be arranged. The strategy used will depend on the state where property is located. The most common is simply called a lease option. Buyers provide the seller with 'option' money which is similar to a down payment.

The second type is Options to Purchase. Although similar to lease options, options to purchase allow sellers to sell the option contract to another person if desired. Sellers do not sell the real estate. Instead, the sell the real estate cash flow note and the contract stays in place.

The third type is Lease Purchase Agreements which usually require a larger down payment than the other two options. In most cases, the down payment is paid over and above rent payments. For example, if the lease purchase agreement extends for 2 years and the down payment requirement is $20,000 the buyer might provide an upfront down payment of $5,000. The remaining $15,000 would be paid in monthly installments over 24 months.

Individuals who enter into lease options must take the same precautions they would if buying houses through a realtor. In order to determine fair market value, buyers should obtain a real estate appraisal, along with a home inspection.

Lease purchase option agreements should be executed by a real estate attorney. Both parties should conduct due diligence. Buyers need to be proactive in making certain mortgage payments are current and the home is not in preforeclosure or foreclosure. Sellers should conduct background and credit checks to ensure buyers are financially capable of paying rent payments.

Lease options usually extend for 2 to 3 years to provide buyers ample time to achieve sufficient credit ratings to obtain bank financing. Buyers must be prepared to provide a down payment and remain current on all rent payments. Buyers should submit lease payments by check and retain copies of each payment.

Some sellers allow buyers to lock-in the purchase price within the lease purchase option agreement, while others require buyers to pay current market value at the time of financing. Considering the current state of the real estate market, it can be difficult to determine which method will offer the best price.

Lease purchase option agreements can offer sellers a good option for selling their property, but can also lead to legal issues such as property damage or collection of rent. There is also a chance that buyers will not be able to qualify for a home mortgage loan once the lease option contract expires. This is especially true when buyers have recently filed personal bankruptcy or lost their home to foreclosure.

As long as contracts are drafted by a lawyer and both parties engage in due diligence, the rewards can outweigh the risks. If you are considering entering into a lease option as a buyer or seller, we invite you to learn more about lease-to-own contracts in our dedicated real estate and personal finance article library. We also invite you to subscribe to our mailing list to receive notification when new articles are published.

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Published on October 02, 2010 at 03:07 AM

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