What's A Lease Purchase?

Most landlord/sellers offer and advertise the lease purchase as a "short or long term financing option" to prospective tenant/buyers. How? Often, landlord/sellers will give "rent credit" each month in return for on time monthly payments and handling repair issues (as if the tenant/buyer owned the home). This rent credit can reduce the principle amount owed under the agreement.

The lease purchase agreement, also known as a "rent to own", "rent with option" and "lease option", is a combination of a lease agreement and a purchase option agreement. Under the lease purchase agreement, the "landlord/seller" gives the "tenant/buyer" an exclusive right to purchase a property at a pre-determined "purchase price" during the length of the lease purchase term. In exchange for the exclusive right to purchase at a pre-determined price, the tenant/buyer gives the landlord/seller a non-refundable monetary amount, called an "option consideration". This option consideration is usually given in lieu of a security deposit and replaces a "down payment" when purchasing conventionally.

The amount of option consideration is negotiated between the landlord/seller and the tenant/buyer. The amount of option consideration set by the landlord/seller is often on a sliding scale, based on the tenant/buyer's qualification. The more qualified the tenant/buyer, the less money they need to give in option consideration. The less qualified the tenant/buyer, the more money they need to give in option consideration. The option consideration amount can be as low of a one month's payment for prospective tenant/buyers with excellent qualifications. But often the option consideration is not the 10-30% down required by banks with prospective tenant/buyers with damaged credit. This creates a WIN/WIN situation between the landlord/seller and the tenant buyer..

Although factors may be weighed differently by each landlord/seller in determining the qualifications of a tenant/buyer, the main factors are:

• Credit score
• Amount available to put down as an option consideration
• Rent history
• Job history

There are a few things that make the lease purchase agreement different than a "standard purchase agreement" or a "standard rental agreement". Below are some of the differences based on the landlord/seller using the lease purchase agreement provided by LPHomes.com:

1. Security Deposit ~ Unlike a standard rental agreement, a lease purchase agreement does not require a security deposit (or if required by state law, a minimal security deposit). Why? The security deposit is replaced by a non-refundable option consideration. The option consideration gives the tenant/buyer the exclusive rights to the home term of the lease purchase agreement,as long as the tenant/buyer abides by the terms of the agreement. And, unlike a security deposit, the option consideration paid up front by the tenant/buyer is credited towards a down payment if the tenant/buyer wants to convert to traditional financing later on.
2. Maintenance ~ Unlike a standard rental agreement, the lease purchase agreement requires the tenant/buyer to perform most maintenance on the home. This gives the tenant/buyer the opportunity to really experience homeownership responsibility before actually committing to purchasing using traditional financing..
3. Rent Credit ~ The lease purchase agreement has the landlord/seller provide the tenant/buyer a "rent credit" during the term of the lease purchase agreement. Rent credit is a predetermined amount of the monthly rent that goes to reducing the purchase amount designated by the lease purchase agreement. It is given only if the tenan/tbuyer makes "on time" monthly payments and abides by all the terms of the lease purchase agreement.

The tenant/buyer gets to move in once the option consideration is paid and the lease purchase agreement is signed. During the lease purchae term, the tenant/buyer can work out any credit issues and/or save for any other additional funds required to convert to traditional financing prior to the end of the lease purchase term.

The tenant/buyer makes lease purchase payments to the landlord/seller for the lease purchase term. The landlord/seller is obligated to pay any underlying mortgage, condo/homeowner dues, tax, and insurance payments. The landlord/seller still gets the tax deductions for these items while making those payments.

Once the tenant/buyer obtains traditional financing, the tenant/buyer notifies the landlord/seller. Closing is arranged, title is transferred, and the tenant/buyer experiences all of the benefits of home ownership (tax deductions and appreciation). After closing, the tenant/buyer stops making lease purchae payments and starts living and loving the American Dream~Homeownership! The landlord/seller has sold the house and avoided paying real estate commissions.