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Residential Lease-Purchase (Lease to Own) Agreement

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The Residential Lease to Own Agreement, also known as an ‘option to purchase’ or ‘lease-purchase’, is a document that gives a tenant the right to purchase the residence they are leasing pursuant to the terms and conditions agreed upon by the landlord which also acts as the seller. The form must be written in accordance with all State landlord-tenant lease laws in addition to following the State’s real estate commission’s rules which typically require certain applicable disclosures to be attached.

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What is a Lease to Own?

A Lease Purchase (“Lease to Own”) is a type of real estate contract that allows a lessee to rent a property while having the option to purchase the rented property before the option term expires. A Lease purchase tends to be used when a buyer wants to purchase property but has low credit and/or needs more time to save enough money for a downpayment.

A Lease Purchase is also referred to as the following:

  • Lease Purchase Agreement
  • Option to Purchase

How does a Lease (Rent) to Own work?

There are many possibilities as to why a buyer or seller would want to enter into a Lease to Own contract. If a seller has had their property on the market for a long period of time without any offers, a lease purchase agreement could be an adequate solution to sell the house. A buyer who falls in love with a property but does not have the credit nor downpayment money to secure financing for it can use this type of contract in order to save money and build credit for a few years to eventually purchase the property.

Rent Payments – As with any other type of lease, rent payments must be made on the date specified in the lease agreement. A percentage of each monthly rent payment may go towards the purchase price. Failure to pay rent on-time can result in forfeiture of the Lease-Purchase Agreement which would also result in the buyer losing Option Money made to secure the agreement.

Option Term and Consideration – The length of a Lease-Purchase agreement typically ranges from 1 to 3 years which is known as the “Option Term”. The Buyer must purchase the property before the option term comes to end or the agreement will expire. Non-refundable money paid upfront, which is a small percentage calculated from the Purchase Price, is known as “Consideration”. This money signals to the Seller that the Buyer is serious and interested about acquiring the property.

Purchase Price – The price of the property can either be agreed upon in your Lease-Purchase agreement or it can be negotiated when the option term comes to an end. If the Seller thinks the market is at its peak or if the buyer thinks the market is undervalued, they should want to lock-in the purchase price when signing the Lease-Purchase agreement.

Closing – The buyer is not obligated to purchase the property when the option term comes to an end. If the Buyer does not purchase the property, the agreement simply expires and they would need to vacate the property. There could be a situation where it makes sense to walk away from the property. For example – After 2 years the prices within the housing market fall and the Buyer realizes that they can find a similar property for half the price compared to their current agreement. Or the Buyer can simply let the Lease-Purchase agreement expire and try to renegotiate a new sales price afterwards.