In today’s tough credit market investors and homebuyers are having a hard time getting reasonable financing to put deals together. Therefore we have been focusing more on creative financing and one of the techniques we like to use is a Lease Purchase Contract. The term “lease purchase” is known by several other names, such as “rent-to-own,” “lease option,” and “lease with the option to buy.” These are all basically the same thing.
How Does It Work?
The lease purchase contract combines a lease agreement with an option-to-purchase-contract. The tenant/buyer pays to the landlord/seller a nonrefundable deposit that is applied to the purchase price of the home (not the down payment.) The tenant/buyer then pays to the landlord/seller rent to compensate them for the use of the property. Rent payments are typically made on a monthly basis with a portion of that payment applied to the purchase price of the home.
During the term of the lease, but before the option expires, the tenant/buyer has exclusive right to lease and buy the home under the terms to which both parties have previously agreed. The seller cannot change their mind, raise the sales price, or further encumber the property or sell to a different party while the tenant/buyer owns the exclusive right to purchase the property.
What Paperwork Is Needed?
There are three parts to the lease purchase contract, the lease agreement, option to buy, and the purchase contract. The lease agreement spells out the terms of the lease. The option agreement will state the option price which is non-refundable and is applied towards the purchase price. It also contains the option term which is the specific date the option expires and the method of exercising the option. If a portion of the monthly rent is being applied to the purchase price of the home it should be stated in this contract as well. The Purchase Contract covers the escrow instructions and timelines of contingencies.
For more information on how lease options work download our FREE ebook The Lease Purchase Handbook by William Parsons.
