If you`re in the market for a new home, you may have come across the term “lease purchase agreement” or “rent-to-own” in your search. But what exactly is a lease purchase agreement and how does it work?
A lease purchase agreement is a type of contract between a buyer and seller that allows the buyer to lease a property for a certain period of time with the option to purchase it at the end of the lease term. This option typically requires the buyer to pay a predetermined amount, known as an option fee, which is applied towards the purchase price of the property if they decide to exercise their option to buy.
The lease term typically lasts between one to three years, during which time the buyer pays rent to the seller. The rent amount may be higher than market rates, but a portion of it usually goes towards the purchase price of the property. This allows the buyer to build up equity in the property over time, which can be used towards the down payment or closing costs if they decide to buy.
One key advantage of a lease purchase agreement is that it allows buyers who may not be able to qualify for a traditional mortgage to still have the opportunity to own a home. This could be due to a lack of credit history, a low credit score, or insufficient income. The lease period gives the buyer time to improve their credit score, save up for a down payment, or increase their income so they can qualify for a mortgage when the lease term ends.
Another advantage is that it allows buyers to “test drive” the property before committing to a purchase. During the lease period, they can get a feel for the neighborhood, the property itself, and whether it meets their needs and lifestyle. If they find that it`s not a good fit, they can simply walk away at the end of the lease term without any penalties.
However, there are potential drawbacks to a lease purchase agreement. For one, the option fee and the rent payments are non-refundable, even if the buyer decides not to exercise their option to buy. Additionally, the terms of the lease and the purchase price are typically negotiated up front, which means that if the property value increases during the lease period, the buyer could end up paying more than market value for the property.
Overall, a lease purchase agreement can be a good option for buyers who are not able to qualify for traditional financing, but still want to own a home. It`s important to understand the terms of the agreement and to work with a trusted real estate agent or attorney to ensure that the contract is fair and in your best interest.
