Another tool in the arsenal of the real estate investor, buyer or seller is the lease purchase contract. This tool is going to become increasingly used as the mortgage markets dry up. But what is it exactly? Many have heard about it through some late night infomercial, and it sounds good, but you may be scared because you heard about it some late night on television, and you don’t trust those infomercials. You are right to do so.
But don’t assume just because you heard about it on an infomercial that the tactic is wrong, illegal, or bad. In fact, there is nothing wrong with doing these types of contracts, and they can be extremely beneficial, especially when a buyer has credit issues, or they are trying to buy in for less cash up front. But let me give you my definition of a lease purchase contract:
“A lease purchase contract is merely a purchase agreement between a buyer and seller that calls for an initial fixed lease period of the property, for a certain rental rate that is divided between ordinary rent for the seller, and a portion that is set aside to assist the buyer in closing the home.”
Now, from the buyers perspective, this is a much better deal than a lease option to purchase contract. Why? Because in this scenario, the buyer does not have to come up with an additional up front monies to gain possession of the property. Just the typical security deposits, etc. and the buyer can move in.
The Main Difference Between Lease Options and Lease Purchases
You see, in a lease option to purchase scenario, the buyer has to pay the “option fee” which basically is a small down payment on the house. This ensures more trust between the seller and buyer, but sometimes the buyer doesn’t have the money, or doesn’t want to spend it yet. This is where the lease purchase contract is better suited.
The Investor’s Angle
Now, think about it from the investor’s point of view. If you can get into a piece of property for just a security deposit and first month’s rent, then you can turn around, make repairs to the property, find a new buyer, and sell the property, isn’t that a lower risk deal than just buying the property outright? Of course. And you might even be able to do a lease purchase or lease option of your own with a new buyer and come out even better in the deal. It all depends on how you structure the contract.
If you are using a promulgated form, you may find that is doesn’t allow for sub-letting, etc. So be mindful when getting involved in these type of deals, and seek attorney help. Tell them your intentions with the property, and have them make the necessary changes to the contract.