What Is a Lease Purchase Agreement?

A lease purchase agreement can be a good option for buyers who want a home but need a little extra time to qualify for a loan or come up with alternative funding to purchase a home. The downside to a lease purchase agreement is if the buyer violates the agreement, the seller may terminate the agreement, and the buyer is left with nothing. A lease agreement is not valid if the home has a prior mortgage with a due-on-sale clause.

Lease Purchase Agreement

A lease purchase agreement is also known as a lease with an option to purchase. This allows buyers who want to purchase a home or property but cannot qualify for a conventional loan the opportunity to do so. The seller of the property will allow the buyer to put a down payment and lease the property by paying an agreed-upon payment until the buyer finds another financial source to purchase the home or property. A buyer also has the option to buy the home at a given time outlined in the agreement. If at the given time the buyer cannot secure an alternate funding source to pay the mortgage, the seller has the right to evict the buyer from the home and keep the down-payment and all rental payments made.

Pre-Existing Mortgages

With lease purchase agreements, the property normally has a pre-existing mortgage. This may prohibit a seller from entering a lease purchase agreement with a buyer. Lenders sometimes put a due-on-sale clause with owners of the original mortgage. The clause means the owner cannot lease the property, and if he or she does, the original loan will have to be paid in full, and the lease purchase agreement between the owner and buyer will not be valid. The only way the lease purchase agreement will be valid is if the owner or seller has the ability to pay off the underlying loan immediately.

Violating Lease Purchase Agreement

With a lease purchase agreement, the buyer can lose the rights to the property if he does not comply with the agreements of the lease. For example, if the buyer fails to make the agreed-to payments, the seller has the right to cancel the lease agreement, and the buyer will lose any payments made prior to the lease being canceled. The buyer also needs to exercise his right to purchase the property when the time comes.

Unscrupulous Seller

With a lease purchase agreement, the seller can make a lease purchase agreement with one buyer, and then transfer the property to another buyer. In addition, the seller can borrow money against the property, and cause the mortgage payment and rate to increase. This is an unscrupulous seller, who can legally get away with doing this. If the seller transfers or sells the property to another buyer, or the lender has to take the property back because of nonpayment, both can do so and cut off the rights of the original buyer.

Right to Property

In a lease purchase agreement, the property owners will remain sellers. If the buyer fixes anything, including roofs, doors or windows, the seller does not have to pay the buyer for the repairs. If the seller later evicts or terminates the lease purchase agreement, the seller does not have to reimburse the buyer for any money the buyer has spent towards maintaining the home. All of the property, including the new repairs and maintenance remains the seller's property until the buyer pays for the property in full.

References

• The Lease Purchase Agreement
• Realty Times