Lease Purchase Option Agreement
Lease purchase option agreement refers to a type of real estate purchase where tenants lease a home with the intention of buying it at a future date. Lease options usually last between 1 and 3 years with a portion of rent money contributed toward the purchase price.
Entering into a lease purchase option agreement provides buyers with bad credit the opportunity to rebuild their credit so they can qualify for a mortgage loan when the contract expires. Lease options can also be a good choice for buyers unable to provide sufficient down payments to obtain a conventional home loan.
The first step to entering into lease options is to determine which type of contract is legal within the state where the property is leased. Three types of lease option contracts exist and include: lease options, options to purchase, and lease purchase agreements.
Lease options require buyers to provide sellers with option money. Similar to a down payment, option money secures the property for purchase at a later date. However, option money is nonrefundable and does not apply toward the down payment when the sale is finalized. Sellers can allow buyers to lock-in the purchase price or require them to pay fair market value when the contract expires.
Lease options prohibit the seller from listing the property for sale during the contract period. Buyers are prohibited from assigning the lease option to another person without seller approval. A portion of rental income is applied toward the purchase price which can range from 1- to 100-percent. Buyers are not required to purchase the home, but will lose all vested funds at the end of the lease option contract.
Options to purchase are nearly identical to lease options. The primary difference is buyers can sell the option to another buyer. This is not to say that the real estate is sold. Instead, the options to purchase contract is sold; allowing the original buyer to continue leasing the property with the intent to purchase when the contract expires.
Lease purchase agreements are similar to a sales contract because buyers are obligated to purchase the property when the contract expires. Buyers provide a small down payment and pay additional funds each month to fulfill the down payment requirement.
For example, sellers require $20,000 down payment, but allow buyers to pay over time. Buyers might contribute $5,000 upfront and extend the remaining $15,000 over the term of the lease. If the lease extends for 3 years, buyers would pay an additional $416.66 per month to satisfy the down payment requirement. Oftentimes, sellers contribute a portion of rent payments toward the purchase price at the end of the agreement.
Lease purchase agreements allow buyers to accrue home equity, as long as the property value accelerates. This type of contract must be executed by a real estate lawyer and include default clauses and possession/occupancy rights.
Entering into lease purchase agreements is the same as buying a house. Buyers should conduct due diligence and obtain property appraisals, home inspections, home warranty plan, and all other facets involved with a regular real estate sale.
Lease purchase option agreements can offer win-win solutions for both buyers and sellers as long as legal protocol is followed. Buyers with bad credit must commit to rebuilding their credit to ensure they will qualify for home mortgage financing when the lease option contract expires.
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