Lease Purchase Agreement for Landlords
State Specific Lease Inserts
The Lease Purchase Agreement
For the Tenant Who Wants an Option to Buy!
Even though The LPA Lease Purchase Agreement represents many years of trial and error learning from very painful and expensive lessons and experiences with tenants, it has successfully saved us over and over again from serious tenant nightmares, and from losing a lot of money!
Part of the Essential Forms Package
This form is a part of the Essential Forms package along with 100+ other forms. You can access all of our landlord forms with an LPA membership.
LPA Landlords who use The LPA Lease with Purchase Option also use:
What Is A Lease Purchase Agreement?
A lease purchase agreement is very similar to a traditional rental agreement, except it allows the tenant to purchase the property at the end of the term. In return for paying a non-refundable option fee, the tenant receives the use of the property for a specified period of time along with the exclusive rights to buy the property. The tenant pays the option fee once the two parties have agreed on the purchase price. This will be the price of the property at the end of the lease term. The renter should be confident in their ability to obtain financing at the end of the agreement because they will be paying higher rent than normal due to the fact that some of their monthly payment will go towards a down payment of the purchase price. If the renter does not qualify for a loan at the end of the contract, he forfeits the option to purchase the home.
Essential Components of a Lease Option
A lease purchase agreement differs from a lease option in several ways. Under a lease option, there is no obligation on the part of the buyer to buy the property unless they exercise their option to do so. If the buyer does decide to buy, the seller is obligated to sell.
When a buyer pursues a lease option, they are required to pay a nonrefundable option fee for the privilege to have exclusive rights to purchase the property as long as the lease is in effect. The amount of the option fee can be negotiated. However, as mentioned above, the option fee is nonrefundable, so whether the tenant decides to buy the property or not, they pay the fee. A renter should be quite certain they want to purchase the property and that they can attain financing before the lease term ends.
Essential Components of a Lease Purchase Agreement
Once the renter and seller have agreed upon a purchase price, the option fee is paid and the renter has the length of the term to purchase the property.
In addition to rent, a lease-purchase agreement contains an amount of money each month that goes toward the down payment when they eventually purchase. If the renter isn't ready to purchase by the end of the lease term, they may have the option to renew the lease. However, If for any reason the renter doesn't purchase the home at the end of the lease term, the down payment amount is forfeited.
In many cases, a lease-purchase agreement will include special clauses that require the buyer to pay property taxes and insurance along with any maintenance costs associated with the home during the lease term.
What to Look for in the Agreement
The lease should clearly state the monthly rent amount along with what part of rent each month is designated toward the down payment. It should also list the option fee, which in addition to being nonrefundable, can be any amount.
The sales contract will pick up where the lease ends and detail the purchasing process. An important consideration of the contract is that the purchase price of the property is based on the fair market value of the rental at the time of the rental agreement. This could be favorable or unfavorable to either party. If the price is higher when the sale is finalized, the seller has missed out on a higher purchase price. On the other hand, if the fair market value of the rental is lower at the time of sale than previously, then the seller has realized a higher profit. In many agreements, the purchase price is inflated to account for appreciation. If the buyer can attain financing and has an acceptable down payment under mortgage guidelines, the lender will transfer funds to the seller and transfer the title to the new homeowner.
Cross Default Provisions
The lease agreement and the sales contract are distinct agreements but have certain elements that affect one another. Each contract will include cross-default provisions that marry certain clauses in each. Furthermore, in the event that either the lease agreement or sales contract is breached, it may cause an automatic breach in the sales contract where the renter forfeits their ability to purchase the property.
While a lease-purchase agreement can be beneficial to both the seller and renter, it's advisable for each party to seek legal counsel to ensure all provisions of the lease and sales contract are understood before entering into such agreements.
How does a lease-purchase agreement help renters?
These agreements help buyers in many ways. If the buyer isn't sure they want to buy the property, a lease purchase option gives them time to decide. They can live in the place for a while and see if they truly want to buy. They can also help buyers attain a considerable down payment simply by paying rent. Or if the renter needs time to build a good credit score and they are sure they want to buy the property, a lease-purchase agreement can give them the time they need.
How is rent to own different than buying a house?
Renting to own is a way to buy a home while renting. While there is risk to renting a home and not having financing in place, renting to own allows for the renter to build their credit or down payment while building equity in a home they intend to buy.
Do the renter and seller execute both a lease agreement and a purchase contract?
Yes. Once an agreement has been made regarding the option fee, the purchase price, and the monthly amount allocated toward the down payment, the renter and seller will sign both a lease agreement and a purchase contract. These contracts will include cross-default clauses where a breach of one agreement will constitute a breach of both.
How is the lease option exercised in the agreement?
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