The typical lease purchase agreement involves a tenant that gets into the property like a normal lease, i.e. they have a security deposit and first month’s rent (if not last month’s rent as well) due and payable up front. They usually pay a slightly higher than market rate of rent, with a portion of the rent being credited to the purchase of the home. The term of the lease and the buyer’s price are determined and negotiated up front, and are all spelled out in the lease.
If the tenant exercises their option to buy at the end of the lease, then all goes as outlined in the lease. But if they fail to buy at the end of the lease, then the owner has the right to cancel their lease, and to retain all rent monies paid during the term of lease, including all monies that were to be credited toward the purchase of the home. Let’s take a look at a quick example:
Let’s say that Tom is tenant and negotiates for a 24 month lease, paying $1,000 per month, with the right to buy the house at the end of the lease for $110,000. He is required to pay a $750 deposit and the first month’s rent. Of the $1,000 per month that he is spending, $100 of it goes toward the closing of the house at the end of the lease. So at the end of the 2 year lease, Tom will have built up $2,400 towards the closing of the property. Usually, the owner does not care how it is allocated. Tom can take it as a credit towards closing costs, or he can take the money off the purchase price of the home, and thereby lower his loan amount.
If Tom fails to pay his rent, or moves to another residence at anytime during or at the end of the lease, then Tom forfeits all monies paid into the property, except for the security deposit, assuming he takes good care of the property.
This is a fairly typical lease purchase agreement, and works as a great way for a tenant with little cash to get into and have ownership potential in a property. It is also a good way for an owner to get an above market rental rate on their property. The disadvantage to the owner is the risk involved, his is giving up (potentially) ownership of the property to another and not getting any up front cash. On the positive side, tenants that have potential for ownership tend to take more pride in the home, and thus take better care of it.
I have a house right now that is in a similar deal, and the tenants are taking fabulous care of the property. They are improving it through interior paint, fine tooth cleaning and they even have landscaping plans in the works.