Rent To Own A Home - Lease Purchase - Useful Information
Lease purchasing can be an excellent option for potential home buyers. In today's real estate market, there are many types of homes
available with this type of home buying option. From homes requiring work, to homes that are move-in ready,
lease purchase homes should be available regardless of what the buyers wants and needs are. Home owners in
many areas are becoming more flexible and are adding this option to get their home sold.
There is no defined structure to a lease purchase. A Realtor® can provide buyer representation and help with
the lease purchase process while helping you avoid potential pitfalls.
What is a Lease Purchase?
The term lease-purchase has been associated with various phrases such as lease option,
rent to own, lease to own, and lease with option to buy. The last phrase mentioned closely
represents what a lease purchase actually is, a lease contract, along with a separate option
to purchase contract, to optionally be executed at the end of the lease.
Benefits of Lease Purchasing and Rent To Own
- Allows buyer to live in neighborhood and area before committing to buy
- Not obligated with option to purchase contract if the home value drops
- Able to live in the home before qualifying financially
- Option and rental amounts may be better than some subprime lending rates
- Purchase price is negotiated early. If home appreciates more than expected,
it could lead to a better deal for the potential buyer.
- Depending on the contract, the potential buyer may have the ability to
sell the option on the home
Lease Purchase Risks - Rent To Own Risks
Home seller could go into foreclosure
Potential home buyers need to ensure the home owner they are renting from is making their payments on the mortgages.
This will help the innocent potential home buyer from getting a surprise eviction
Home Price Declines
The actual selling price is typically determined at the beginning when the lease is signed.
At the end of the lease, if the selling price is priced too high as a result of home prices
declining or poor appreciation, the option price may not be desirable for the buyer.
Leasing and The Lease Contract
It is important for the potential home owner to understand the details contained in the
contract and what may be necessary to add. Below are some of the important parts to
understand in regards to the lease.
Length Of Lease
The lease contract on the home can exists for any time range, but the lease is typically
are signed for one to three years. If the buyer is lease purchasing because of credit issues,
they may want to consider talking to the necessary professionals in regards to their credit.
The right professionals can help the potential buyer understand what is required to get their
credit where it needs to be and provide an idea of how long it will take in order to acquire financing.
Rent Payments
When searching for a lease purchase, one may notice the rent payments are higher than other home for rent. This may be the case on some homes because the seller is offering the buyer a special type of service.
Late Rents
A late rent payment can lead to a late fee, but it can also lead to additional penalties.
Potential buyers should think about different things to ask the seller in regards to late payments.
Rent Credits
Some sellers may issue a Rent Credit to the potential buyer. A rent credit is when a portion of the monthly rent is applied as a credit towards the purchase of the home. It is important to know if there is a rent credit when looking at the monthly rent being charged. One home may have a cheap monthly rental rate, but not provide any rent credits. Another home may have a higher monthly rental rate, but include a large monthly rent credit. Furthermore, it is important to know what may affect rent credits already or currently being earned. For instance, does a late monthly payment cost the renter the rent credit for the month?
Home Repairs and Bills
Renters should know what repairs and bills they are responsible for while renting. What happens if the toilet is not working? What if the roof caves in from bad weather. Some repairs are simple while some can be overwhelming. Asking questions will help the potential buyer from being unpleasantly surprised.
End of Term
There can be many concerns at the end of the lease period, especially if the
renter is unable to get financing at the end of the lease.
- What happens to any rent credits earned?
- What happens to the down payment (consideration)?
- Will the renter be allowed to continue renting and renew the lease?
- Will the monthly rent amount be affected?
- Is additional consideration money needed?
The Option To Purchase Contract
While a normal purchase contract with stipulations could be used, potential home buyers usually use an option to purchase contract. This will allow the buyer to not be under contract to have to purchase the home in case of financing problems or deciding not to purchase the home for other reasons.
Home Purchase Price
The purchase price of the home is usually agreed upon in advance. Depending on how long the lease is and when the buyer is expected to close on the home will affect the selling price of the home. Appreciation or potential depreciation on the home will be factors. Potential buyers may also have to pay a slight premium since the home is being purchased as a lease purchase.
Down Payment Consideration
The down payment towards the home is commonly referred to as "Consideration". The consideration will be applied towards the purchase of the home. A majority of the time, a down payment is required and usually ranges from 1%-3%, but at times may be as high as 10%. Some sellers, especially those who are motivated, may not demand a down payment at all.
There is no defined structure to a lease purchase. A Realtor® can provide buyer representation and help with the lease purchase process while helping you avoid potential pitfalls.