For potential first-time home buyers who need more time to improve their credit scores or prepare for a down payment, rent-to-own agreements are pretty alluring. Of all the rent-to-own alternatives, lease purchase agreements are undoubtedly the most legally enforceable.
With our in-depth analysis of a lease purchase arrangement and its advantages, you can determine what is at risk and whether it is the best course of action for you.
In real estate, a lease-purchase agreement is a rent-to-own arrangement between a renter and a landlord that enables the latter to buy the property in the future. In exchange for having the only right to acquire the property, the renter pays the seller an option fee at the agreed-upon purchase price.
At the end of the lease period, the house purchase price will be agreed upon by both parties. A clause requiring that a percentage of the monthly rent go toward a down payment will probably be included in the agreement. To retain the buy option, the tenant must be sure they can obtain a mortgage after the lease.
Two separate contracts are frequently included in lease buy agreements: one for the lease and the other for the end-of-lease selling. Cross-default provisions in these two separate contracts will render some terms mutually exclusive. Therefore, violating even one clause—for example, by skipping a payment—might result in a purchase agreement violation.
All the typical components of a conventional lease are included in the lease agreement, along with a few unique provisions, such as the buyer obligation to cover maintenance costs, property taxes, and insurance premiums. So naturally, the lease should specify how long the lease will last and how much rent will be paid each month. Longer lease terms, usually up to three years, are standard in lease buy arrangements.
The amount of the option fee, the purchase price, and the down payment are some unique provisions to watch out for. Both sides will agree upon the option price, and even if the landlord changes their mind, they are legally obligated to sell the property to the renter if they want after the lease. Such a contract has a price. Any sum may be used as the choice fee, which is not refundable.
In this contract section, a rent payment amount is usually a down payment. Consider a tenant paying $2,000 a month for a $250,000 house and contributing $400 monthly for a down payment. The buyer has the choice to utilize $9,600 as a 3.8% down payment at the end of a 24-month lease, which is somewhat more than the required amount for most mortgages. The down payment is lost if the buyer decides the house isn't right for them and backs out of the deal.
Because that is what they are, lease purchase agreements should be taken just as seriously as a house purchase. Lease purchase agreements can help renters who need extra time qualify for a loan and house owners with difficult-to-sell properties. Make careful to have a lawyer check any agreements in advance.
