Lease Purchase Overview
Lease Purchases are a very popular way to sell or buy a house these
days. What is the difference between homes for lease purchase and homes
for lease option. What are the benefits of each?
What is a Lease Purchase?
A Lease Purchase allows you to rent and occupy the home while having
a contract to purchase the property for a set amount at a predetermined
time in the future. There are two documents involved; a lease or rental
agreement, and a purchase contract to buy the property at a later date.
Lease purchase agreements vary from transaction to transaction, so there
is not one universally standard contract.
Lease Options are similar in that they often lock in
the price of the home at the onset of the contract. However, with many
Lease Options you have the right to purchase the property by a certain
date, but are not obligated to do so. Most often, options money is non
refundable in the event you do not purchase the property.
With current forecasts of growing home values, however, it's not surprising
to see Lease Purchases and Lease Options gaining favor today.
Benefits of Lease Purchase for the Tenant/Buyer
- Minimum cash may be required up front. Sometimes buyers with credit
problems will benefit from this purchase method, since sellers may
finance you, OR the method affords you time to repair less-than-stellar
credit before you purchase, using a mortgage loan you acquire yourself.
- Your home buying power is increased, as you now have the ability
to purchase using alternative methods (Lease Purchase or Lease Option).
- You have faster equity growth than if you were just renting, and
faster than with conventional financing. Some of your rental or option
money is working for you towards the purchase. You may have a lower
down payment at closing since you will have option money or rental
credits to apply. By the time you purchase, prices may have appreciated
beyond your locked-in price, giving you additional equity when you
eventually sell.
- A lease purchase gives you sufficient time to check out all the features
and faults of the house. Also, you have time to check out the neighborhood,
schools, churches, temples, synagogues, nearby shopping, health care
facilities, recreation, and your next door neighbor before you buy
the house.
- With a lease purchase, you skip paying closing costs, traditional
down payment and other fees normally found in a purchase using conventional
mortgages.
- While you are leasing, you have no taxes or property insurance to
pay (the owner does that). Major repairs are normally the owner's responsibility
until you buy the house, at which time YOU become the owner!
- Every type of home is available for lease purchase in all price ranges
and locations.
What is the first step?
Typically, your first step is to create a timeline. This timeline is
for repairing your credit and determining the steps you need to take
so that you can purchase your home within 1-2 years. Many owners offering
Lease Purchases can work with you on the many options, provide flexible
down payments and tailor the transaction to your needs. Many have a can-do
attitude and tailor the deal to best suit your needs.
When Can I Move In?
Many lease to own homes are vacant and available now! Once
you are approved, you may be in your home within 3-5 days.
Lease Purchase Agreements
A Lease Purchase Agreement is usually two separate agreements
between the parties: a Lease Agreement and a Purchase Agreement. The
Lease Agreement is a fairly standard rental agreement. The Lease Purchase
Agreement is a purchase/sale agreement whereas the tenant/buyer is contracting
to purchase the house for a specified price and term. The Lease Purchase
shows a definite intent to purchase the property, and sets the terms
upon which the sale of the property will occur. This differs from a Lease
Option where the tenant/buyer has the right but not obligation to purchase
the property.
The value of the home may increase if the Lease Purchase
Agreement has a term of many months or years, but the price and other
terms are fixed in the purchase agreement. The seller cannot sell the
house to anyone else as long as the Lease Purchase Agreement is in force.
The Purchase Agreement should contain all the terms normally
found in a Purchase Agreement, including such issues as closing costs,
buyer's inspection rights, what the seller's disclosure obligations will
be, what personal property will be included or excluded from the sale,
and what will happen in the event either party does not comply with the
contract.
There is no standard lease purchase agreement, so read
over the entire agreement and know who you are dealing with. If in doubt,
run any forms by your lawyer prior to signing.
What is a Lease Option
to Purchase?
Often the biggest obstacle to becoming a homeowner is coming
up with enough cash for a down payment. One way for cash-strapped home
buyers to realize their dream is to lease a home with an option to buy.
Here's how a lease option works. The buyer (called an optionee)
leases the property from the seller (called an optionor) for a period
of time. The lease contract gives the optionee the right to buy the property
at the end of the lease period, or earlier by mutual agreement, at a
price agreed upon in the contract.
The optionee pays a sum, called option money, to the seller
at the beginning of the lease. This money is applied to the purchase
price of the home if the option is exercised. The option money is forfeited
to the seller if the optionee doesn't go through with the purchase. The
option money is non-refundable.
Like any contract, the terms of a lease option are negotiable.
The length of the lease typically can be 12 to 24 months, but anything
may be agreed upon. The amount of the option money, the purchase price
and the rent amount per month may also be up for negotiation. Sometimes
a seller will agree to credit a portion of the rent toward the purchase,
providing an additional incentive for the buyer to go through with the
purchase. One thing is certain: during the lease period, the seller cannot
sell the property to another buyer!
Even though the amount of the option money is negotiable,
it's usually less than the down payment amount required to purchase the
property following conventional practices. So for relatively little cash
up front, a lease option allows the buyer to tie up a property at today's
prices, and live in it before making a decision to purchase. If you're
buying in a market where home prices are rising, a lease option might
be a wise choice because you set the purchase price up front.
There are two parts to a lease option agreement. The first
deals with the terms of the lease (rent), and looks like a standard lease
agreement. The second deals with the terms of the purchase and looks
like a normal purchase agreement.
Home buyers who have a house to sell in another location
may be able to lease option a home to give them a place to live and time
to sell their home. Then they are able to use their equity from the sale
to purchase the home they are renting at an agreed price.
NOTE: Since you forfeit your option money if you don't
go through with the purchase, don't option a property that you have no
intention of buying.
Owner Financing?
Owner financing, simply stated, is a seller willing to help a buyer by
financing part or all of the purchase price. Usually, the buyer makes
a down payment and the seller will carry a first mortgage, second mortgage
or an Agreement for Deed (also called a Land Contract).
Lease Option Agreements
A Lease Option agreement is usually two separate agreements
between the parties: a Lease and an Option Agreement. The Lease Agreement
is a fairly standard rental agreement. The Option Agreement is a purchase/sale
agreement whereas the tenant/buyer has the exclusive right to purchase
the house for a specified price and term. The price of the home may increase
if the Option Agreement has a term of many months or years. The seller
cannot sell the house to anyone else as long as the Option Agreement
is present.
The tenant/buyer leases the house for a specific monthly
rent and term. Part of the rent may or may not be applied to the purchase
price. The Earnest Money Deposit (also called an option fee), price and
terms of the sale are negotiated in the Option Agreement.
The Lease Agreement usually has a default clause. If the
tenant/buyer does not pay the rent as agreed in the Lease Agreement,
the Option Agreement is null and void, and the Earnest Money Deposit
is forfeited by the tenant/buyer.
Lease Option arrangements work very well for buyers needing
to improve their credit. The tenant/buyer can find a home they wish to
purchase, move in, enroll their children in school and enjoy the home
while rebuilding their credit. The on-time rental payments will help
build the tenant/buyer's credit rating. Coaching and mentoring the tenant/buyer
on methods to improve their credit is of great benefit to the Tenant/buyer,
and helps to prepare for the responsibilities of home ownership.
Many lenders consider the execution of the Option Agreement
as a refinance loan instead of a purchase loan. A refinance loan usually
has more liberal underwriting criterion than a purchase loan. Therefore,
refinance loans are easier to qualify. Also, increased equity may be
considered in the loan to value calculation.
Some lenders recommend that sellers lease option a home
to a tenant/buyer before carrying a mortgage for the buyer. This way
the seller will have a payment history with the buyer, and proof of the
buyer's ability to handle financial responsibility. Foreclosure of a
mortgage is a much more difficult and lengthy process than an eviction
on a lease agreement.
Comparison of Lease Purchase
and Lease Option
With both the Lease Purchase and Lease Option, you have
two agreements: a lease and either a Purchase Agreement or a Lease Option
Agreement.
The main difference is that with a Lease Option, you have the legal right
to purchase the property for a fixed period of time, but are not required
to purchase the property. With a Lease Purchase, you have a definite
Purchase Agreement stating that you will buy the property for a certain
price and terms by a certain date. You are more locked into the transaction
with a Lease Purchase.
Difference Between "For
Rent" and "For Lease"
These terms are practically the same. You would sign a
lease agreement for your protection in renting a house. So "For
Lease" and "For Rent" are the same. Technically, you could
rent a property without signing a lease, but that would not be wise.
When you have a lease, you are renting the property.
"Rent to Own"
Sometimes you will hear that the status of a house is "Rent to Own."
That generally refers to a house that is available for a lease purchase,
as described above.
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