How Can Owners and Buyers Benefit from A Lease Purchase Agreement?

By thewriteDuffy •  Updated: 06/07/24 •  6 min read

A lease purchase agreement, also known as a rent-to-own agreement, is a contract between a landlord (property owner) and a tenant (potential buyer) that allows the tenant to rent a property for a specified period of time with the option to purchase the property at the end of the lease term.

Here’s how both parties can benefit from this type of agreement:

Benefits For Landlords (Home Owners):

  1. Guaranteed Rent: Landlords can expect to receive a steady stream of income, as the tenant is obligated to make rent payments during the lease term.
  2. Increased Property Value: The tenant is usually responsible for making necessary repairs and improvements to the property, which can increase the value of the property over time.
  3. Reduced Vacancy: The lease-purchase agreement can reduce the landlord’s exposure to long-term vacancies, as the tenant is committed to renting and potentially purchasing the property for a set period of time.

Benefits For Tenants (Buyers):

  1. Opportunity to Buy: The lease purchase agreement provides the tenant with the opportunity to buy the property at the end of the lease term, usually at a predetermined price.
  2. Time to Improve Credit: The lease period allows the tenant to improve their credit score, which may make it easier to secure financing to purchase the property.
  3. Option to Back Out: If the tenant decides not to purchase the property, they are not obligated to do so and can simply move out at the end of the lease term.

Drawbacks of a Lease Purchase Agreement

there can be drawbacks to a lease purchase agreement that both landlords and tenants should be aware of before entering into such an agreement.

Drawbacks For Landlords (Home Owners):

  1. Lower Sale Price: If the real estate market declines during the lease term, the landlord may be forced to sell the property to the tenant for a lower price than they would have received in a traditional sale.
  2. Responsibility for Repairs: While the tenant is usually responsible for making the usual and necessary repairs and improvements to the property, some landlords may still be responsible for major repairs or maintenance issues should they arise.
  3. Default Risk: If the tenant defaults on rent payments or decides not to purchase the property at the end of the lease term, the landlord may be faced with a prolonged eviction process and the property may remain vacant for a period of time.

Drawbacks For Tenants (Buyers):

  1. Non-Refundable Option Fee: A lease purchase agreement usually requires the tenant to pay a non-refundable option fee at the beginning of the lease term, which can be a substantial amount of money.
  2. Higher Rent: The rent in a lease purchase agreement is often higher than the rent in a traditional rental agreement, as the landlord may charge a premium for the option to purchase the property.
  3. Risk of Market Fluctuations: If the real estate market declines during the lease term, the tenant may end up paying more for the property than it is worth.

It’s important for both landlords and tenants to carefully weigh the benefits and drawbacks of a lease purchase agreement before entering into such an arrangement. It’s recommended to consult with a real estate lawyer or another qualified professional to help ensure the agreement is fair and in the best interests of both parties.

How Do You Arrange a Lease Purchase Agreement

To obtain a lease purchase agreement, both parties should agree on the terms of the agreement, including the length of the lease term, rent amount, option price for the property, and any repair and maintenance responsibilities. Usually, the Landloard will be responsible for having the document itself drafted.

I would always suggest having a real estate lawyer draft the agreement, but if you want to draft it yourself using online resources, you’ll at least want to have a lawyer review the agreement before it’s signed to ensure it is legally binding and protects the interests of both parties.

How Long Is a Typical Lease Purchase Agreement?

A typical lease purchase agreement can last anywhere from one to three years. The length of the agreement can vary based on a number of factors, such as the tenant’s credit score, their financial goals, and the current real estate market. The length of the agreement should be agreed upon by both parties and outlined in the lease-purchase agreement.

It’s important to note that the length of the lease purchase agreement should be long enough to allow the tenant to improve their credit and save up enough money for a down payment, but not so long that they risk missing out on a more favorable real estate market or interest rate. Ultimately, the length of the lease purchase agreement should be tailored to meet the specific needs and goals of both the landlord and the tenant.

Would the Purchase Price of A Home Change During a Lease Purchase Agreement for Any Reason?

Yes, the purchase price of a home in a lease purchase agreement can change for various reasons. Some of the factors that can affect the purchase price include changes in the real estate market, fluctuations in property values, and inflation.

The lease purchase agreement should specify the purchase price at the time the agreement is signed, and it may include a provision for the price to be adjusted based on certain criteria, such as changes in the Consumer Price Index (CPI) or local real estate market conditions.

It’s important for both the landlord and tenant to understand and agree on any provisions for adjusting the purchase price before signing the lease purchase agreement. If either party is unsure about any provisions or clauses in the agreement, it’s always a good idea to seek the advice of a real estate lawyer.

Conclusion: Is a Lease Purchase Agreement Ideal for Your Situation?

A lease purchase agreement can be a beneficial arrangement for both landlords and tenants, but every situation is unique.

Landlords can benefit from a guaranteed stream of income, increased property value, and reduced vacancy, but may face the risk of a lower sale price, responsibility for repairs, and default risk.

Tenants can benefit from the opportunity to buy the property at the end of the lease term, time to improve their credit score, and the option to back out if they choose not to purchase the property but have to be wary of the risks of a non-refundable option fee, higher rent, and the risks associated with market fluctuations.

A typical lease purchase agreement can last anywhere from one to three years, and the purchase price of the property may be subject to change based on certain criteria specified in the agreement.

It’s important for both parties to clearly understand and agree on the terms of the agreement before signing, and it’s always recommended to have a real estate lawyer review the agreement to ensure it is legally binding and protects the interests of both parties.

If all that sounds perfect to you, a lease purchase agreement may be a great fit for your situation.

thewriteDuffy

At home, April is a mom, wife, and DIY darling. Among other home projects, she helped her husband Dan renovate their 1986 bungalow and is currently designing and decorating the 2023 custom home they are building themselves. Professionally, April is a writer, author, and online marketer with 15 years of experience writing for newspapers and magazines, building online authority websites, and publishing books.