If you’ve heard the term “lease option to purchase” thrown around when talking to other real estate investors, agents, etc. and not sure what the term actually means, then you’ve hit the right page. You’ve done the right thing by searching the web or following this blog in order to gain the insight required to do some of these creative financing deals. Now, unlike some other sites out there on the web that are just trying to sell you a form or cram some bologna down your throat, I actually have done a lease option to purchase agreement. So when I give you the definition of this, you can rely on what I’m saying. So here it is:
“A lease option to purchase is a contract that provides the buyer with a standard lease agreement for specified period of time, coupled with an option payment, and a fixed price that enables them to buy the property at the end of the lease agreement.”
The Mechanics of the Lease Option
Here’s a basic example: Buyer wants to buy a piece of property, but they don’t yet have the credit score, down payment necessary for a mortgage, etc. to be able to buy the property. So they sign a lease option to purchase agreement with the seller, for let’s say, 24 months. A rental rate of $1,000 is agreed on, and an up-front option payment of $3,000 is paid by the buyer to ensure that they can buy the property for the agreed upon price of $150,000 at the end of the 24 months.
Note: With a lease option to purchase, there aren’t any partial rent payments that go to principle, the seller gets the option payment up front, kind of like a down payment, except it is almost always a fraction of what the buyer would put down with a mortgage company or bank. In our example above, the option payment is only 2% of the purchase price.
Benefits to the Buyer
As I elluded to above, on the benefits of this contract to the buyer is that they can get into a rent to own situation without having good credit. This gives them a chance to build up better credit, save money for a mortgage down payment, and test out the property to see what kind of maintenance, etc. will be needed over time.
Another great buyer benefit is being able to negotiate the purchase price of the home based on the current market value, instead of having to wait until the end of the contract and paying an appreciated price.
Benefits to the Seller
One the best benefits that the seller receives in a lease purchase is the serious nature of the buyer. This buyer has put down an option payment and first month’s rent before they ever step into the property. Since they have already spent what could be several thousand dollars, they are much more likely to take pride in maintaining the property. Furthermore, they intend to buy the home, and thus will have a greater desire to take care of it.
The other great benefit to the seller is the drop out rate of the buyer. Often, when the lease period is over, the buyer is still not able to buy the house, and the seller then has the option to give them notice to move out, and keep the option payment. This allows the seller to re-sell the property, perhaps under another lease option agreement, collect another option fee, and repeat the process.
To sum it up, a lease option to purchase contract can be a win-win solution for a buyer that needs a little help getting into a property, and for a seller that wants to obtain a renter that has an appreciation for the property. Like I have said previously, I have done this type of deal in the past and it has worked for me.