» » Residential Lease-Purchase (Lease to Own) Agreement

Residential Lease-Purchase (Lease to Own) Agreement

Create a high quality document online now!

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.

By State

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 a 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.

A lease to own agreement allows a potential home buyer, or “lessee,” to live as a tenant in the sale property for a set term and make rent payments that are partially credited toward the eventual purchase. While the buyer is not required to complete the purchase when the contract ends, all accumulated credits are forfeited if the transaction is not completed.

Why is a lease to own agreement a good alternative for both buyers and sellers?

Though the housing market has largely recovered post-recession, selling and buying remain difficult for some. In certain places, renting still makes more financial sense; meanwhile, tighter credit standards prevent those with less-than-stellar credit or insufficient incomes from securing a mortgage.

The lease to own option is a compromise. It relaxes financial and time pressures for buyers – allowing them to bolster credit and earnings while making payments toward purchase – and provides an easy income stream to the seller. The prospective buyers get a place to live while financial matters are sorted out, and the seller collects a monthly check that may be used to defray mortgage costs or underwrite the purchase of a new home.

The Basics of Buying and Selling

While some buyers and sellers exclusively seek lease to own arrangements, others keep it in their back pockets as an alternative option in case they are unsuccessful in the traditional market. The lease to own contract is not a purchase agreement. While the buyer secures the right to purchase, the contract does not represent a commitment for the buyer to complete this transaction.

The same guidelines that apply to conventional homebuying hold for lease to own sales.

Selling a Home

Sellers may enlist a broker or a real estate attorney, or they may choose to go it alone. Real estate has been democratized by the internet. With the right motivation, patience, and care, it is possible to buy and sell without an agent or attorney.

Besides, lease to own contracts are not necessarily realtor-friendly. Since agents collect fees when transactions are completed, lease to own deals can complicate things. They are inherently provisional arrangements – and it can be several years before a decision on whether to purchase is made. Though the average realtor’s commission of between 5-6% may seem paltry against the large sums changing hands in a typical home sale, the same percentage looms large in the context of a rent-to-own agreement – especially without a large mortgage check coming from the bank.

Popular websites for those going it alone include Zillow and Redfin.

The Inspection

The home inspection is a non-negotiable step in the purchase process. In many jurisdictions it is a legal requisite and is almost always required as a condition of mortgage-financing. Whether the sale ultimately occurs or not, a prospective buyer should be confident in the condition of their home – that it is free of major structural or electrical issues, or other liabilities.

The Lease to own Contract

It is easy to find generic lease to own agreements online that can be modified to specific circumstances. But this legal document makes a big financial splash – so it is essential to carefully consider the terms and ensure that all contingencies are spelled out in clear language.

At the very least, a lease to own contract should cover the following:

Purchase price and closing

In general, the purchase price is negotiated at the start. Even if the housing market shifts over the life of the contract, the seller has committed to this price and may not renege simply because it might be possible to sell for more. The contract should also specify who bears closing costs. Typically, these are split between buyer and seller.

Monthly rent and rent credit

This is the amount that the lessee is responsible for paying each month. Unlike conventional rental agreements, though, part of this monthly payment is held by the seller – usually in escrow – as a credit toward an eventual sale. The portion of the rent that is saved as rental credit should be set in the initial contract.

Consideration fee or option fee

A lump sum that is due at signing. The consideration fee or option fee is a negotiated portion of the agreed-upon purchase price, set aside with the accumulated rent credits to be used for the future down payment, should the buyer choose to purchase the home.

Lease term

The parties agree on a contract length. At the end of this period, usually between 3-5 years, the lessee must decide whether to purchase the home. Generally, the buyer may complete purchase early if ready.

Other contingencies

Like any other contract, the lease to own agreement should address potential problems. What happens if the lessee fails to pay rent on time? Who is responsible for maintenance? Are cigarettes or pets permitted indoors? Since this is a rental contract too, the seller may specify a security deposit too.

Addressing these contingencies can be especially critical with lease to own agreements, since buyer and seller are uniquely interdependent though the term. While a conventional home sale is quicker and more cut-and-dry, the lease to own arrangement means that the parties are collectively moving toward sale – a process that can play out over several years.

Finalizing the Agreement

The lease to own contract should be signed and notarized, and copies should be given to both buyer and seller. For confirmation, some buyers and sellers hire an attorney to review contract provisions prior to finalizing the agreement. This document is legal and binding, and its terms will have a significant financial and logistical impact on all concerned.

Why Would a Renter Want a Lease to own?

Lease to own contracts represent a compromise solution for prospective buyers who are not financially ready or otherwise willing to make a home purchase. For those with insufficient credit or a salary that is too low to meet lender requirements, the lease period provides time to solidify financial credentials. Meanwhile, the price is locked in. The buyer does not have to worry about being left behind as real estate prices continue their upward ascent.

Even for those with the means, a lease to own arrangement offers flexibility in a kind of trial period. Though lessees face some financial loss if they choose to walk away,, the option to try a home and neighborhood before buying can be well worth it for some.

Buyers often find themselves in lease to own territory due to past credit problems. While these contracts may represent an ideal option for some consumers, they also present financial risk. All buyers who are considering lease to own deals should aim to improve their credit scores. A superior credit profile means better financing options – either in the form of a more favorable mortgage to complete the lease to own purchase, or in financing for a traditional home purchase instead of leasing to own.

Pros and Cons from a Seller’s Perspective

Many sellers choose the lease to own route for expediency. Since this arrangement generally represents a lower financial bar and more flexible terms for prospective buyers, it can be mean a quicker route to revenue. Of course leasing to own carries many of the same risks as any landlord-tenant arrangement. The property owner may still be responsible for handling exigencies, and a raucous or otherwise irresponsible tenant can be even more of a headache when they are a party on a lease to own contract.

Since lease to own tenants are vested in their residences, they have particular incentive to be respectful. But things can still go south. It is essential to spell out all such contingencies in the original agreement.

FAQs

What is the typical term of a lease to own contract?

Typically, these arrangements last for between 3-5 years.

Is the renter obligated to purchase the house when the contract expires?

No. When the contract expires, the buyer must decide whether to complete the purchase or to walk away. If the buyer wishes to proceed, the seller is obligated to comply.

Is consideration money non-refundable?

Yes. In most cases, any consideration payments, along with all accumulated rent credits will be forfeited if the purchase is not completed. If the sale is successful, consideration money will be used as partial financing.

Can rent payments be applied to the purchase price?

Yes. A portion of the monthly rent, commonly called the “rental credit,” is held separately by the seller as an eventual credit toward the purchase price. As with the consideration fee, however, the lessee surrenders this balance if the sale does not go through.


ABOUT SSL CERTIFICATES