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Tips on Lease Option or Rent-to-Own Purchase Agreements

Written by: Kristy Welsh

Last Updated: August 10, 2017

With the credit and real estate market enduring recent difficult times, what we normally consider a traditional real estate transactions are becoming few and far between. Contingent on the area of the country you reside, many real estate transactions today involve bank-owned, short sale or foreclosure properties. Homeowners who legitimately need to sell their homes are finding it increasingly challenging to find qualified buyers, and as a result are seeking alternative ways to sell, or at least obtain a source of income, from their homes.

What is a Lease Purchase Agreement?

One such method that some homeowners are utilizing is called a lease option or lease purchase transaction. Lease option sales have been around a long time, and were popular financing instruments in the late 1970s and early 1980s. A lease purchase sale involves a potential buyer locking in an option to purchase a property within a specified period, ranging from 1 to 4 years, at a pre-determined price. The buyer typically pays an option fee, 1 to 5 percent of the price, which is credited to the purchase price, and takes possession of the property as a renter. Part of each month's rent may be credited toward the purchase price, contingent on the contract. If the buyer decides not (or is unable) to exercise the purchase option, the buyer will most likely lose both the option fee and any accumulated rent premium.

The lease-purchase offers homeownership opportunities to individuals who can't qualify for a loan from any source, but feel as though they will be able to by the time the option period is complete. For potential homebuyers with poor credit or not enough cash for a traditional 20 percent down payment, a lease-purchase agreement may benefit them by allowing time to build equity until conditions improve and/or until they repair their credit sufficiently to qualify for a traditional mortgage. During the option period, they have the opportunity to rebuild their credit and accumulate equity while living in the house. The bet is that before the option period expires, they will qualify for the mortgage they need to exercise the purchase option.

Are Lease Purchases a Good Idea?

Lease purchase or rent-to-own contracts can be very risky, especially for the buyer. With home prices declining in many areas of the country, the premise of a potential buyer building equity, while paying rent towards the purchase price is no longer a given. Both buyers and sellers must beware of potential fraud and thoroughly investigate the property and parties involved prior to entering into one of these lease option agreements.

Before entering into any lease-purchase agreement, buyers and sellers should always obtain the advice of a real estate lawyer. We are not lawyers, and laws vary from state to state regarding lease purchase and lease option agreements so you will need to do your research for your property location. With that disclaimer, here are some general tips and advice regarding lease purchase agreements for both buyers and sellers.

Current trends suggest that lease purchases and rent-to-own transactions are on the rise, particularly in areas where the housing market has seen significant declines. Before entering into any type of lease purchase agreement with a seller, buyers should seek the advice of a real estate lawyer and obtain all associated information on the property and parties involved. Although there is some appeal to this type of transaction in these difficult economic conditions, lease-purchase transactions may offer benefits as well as risks to both buyers and sellers.

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