What is a Lease with an Option to Buy Contract?
Home ownership remains one of the most important personal and investment goals for people from all walks of life. Many people pursue that objective by obtaining a home mortgage loan to finance such a purchase. For some individuals, a home mortgage loan is beyond their reach. The lease with option to buy contract provides a mechanism through which an individual who cannot qualify for a mortgage financing nevertheless has the ability ultimately to make the purchase of a residence. The lease with option to buy agreement also provide a landlord the option of selling a property for a fair price without having to wait for a mortgage lender-qualified buyer.
Other People Are Reading
-
Types
-
Real estate lease with option to buy contracts tend to take one of two different forms. First, there is a type through which a portion of the monthly payment made by the tenant is attributed to rent, while a portion is used as a credit toward the purchase price. (This allows the renter the ability to purchase the property without obtaining third-party financing.) Second, there is a type of agreement in which the tenant pays rent for a set period of time after which a bulk payment is made to effect the purchase of the property. (This allows the renter the ability to improve his or her credit standing in hopes of being able to obtain financing at a later date.)
Benefits
-
There are a number of benefits associated with a lease with option to buy contract. An individual who has a less than ideal credit history will be able to make the purchase of a home. A landlord will be able to have more options by being able to select from a wider range of tenants, including individuals interested in home ownership. The property itself will be better maintained by the tenant because this individual realizes that in time he or she will own the property.
-
Considerations
-
Both the renter (prospective buyer) and landlord (prospective seller) have a number of important considerations that need to be kept in mind. From the seller's perspective, even though a potential tenant may not have the best credit history, that individual needs to be able to demonstrate the financial wherewithal not only to make recurring lease payments but to be able to conclude the purchase option when that time comes. The renter needs to consider the fact that he or she will have no equity whatsoever in the property until the point in time that the purchase option is executed. If that option is not executed, the recurring rental payments simply cannot be recouped in any manner unless there is an express provision allowing for such a payment.
Misconceptions
-
Although a lease with an option to purchase can be fairly straightforward, there are some misconceptions associated with this type of agreement and transaction. The most prevalent misconception tends to be that a person who enters into this agreement with hopes of exercising the option to buy at a future date will be entitled to a refund of a portion of the payments made if he or she ends up defaulting on the contract. Such an individual obviously is entitled to no refund of the rental payments. Moreover, under the terms of many lease-purchase contracts, a person who defaults on the contract in this manner additionally will have no recourse to receive a return of that portion of the payments that were attributable to the purchase price.
Warning
-
Both landlord and tenants need to appreciate that a lease with option to buy agreement is not some sort of magical instrument that will solve all of their real estate issues and problems. This type of agreement can only be effective if the landlord and would-be seller has the financial wherewithal to maintain ownership of the property without full payment for an extended period of time. Moreover, the tenant is going to have to be realistic about his or her own ability to be able to satisfy all of the terms of the lease with option to buy agreement with what can amount to a good deal of money being lost in the process.
-
