Home shoppers who are not yet ready to commit to a transaction, or who want to live in an area before completing the purchase, may consider either a lease option or a lease purchase arrangement. Though the two agreements fulfill similar purposes, real estate shoppers should understand some critical differences before entering either agreement.
A lease option functions much like a traditional lease but with an added option to purchase the property. In a lease purchase, by contrast, the real estate shopper commits to purchasing the property after leasing it for some period of time.
When a prospective home buyer enters into a lease option or lease purchase, according to the personal finance website Financial Web, he may feel much like he has entered a more traditional lease; the homeowner still performs major repairs, receives monthly rent payments and holds responsibility for taxes, insurance and homeowners fees. At the end of the lease, buyers in a lease purchase agreement have an obligation to obtain funds to finalize the purchase of the property while those in a lease option arrangement may choose to simply move out.
Because both lease options and lease purchases initially function much like traditional leases, the seller may require the buyer to pay an initial deposit. Depending on the precise language of the agreement, the buyer may use the lease security deposit as additional down payment funds in either type of transaction.
In a lease option, the buyer may expect to receive a refund of the security deposit if he chooses not to purchase the property. For this reason, according to the leasing information website Lease 2 Purchase, many sellers charge a separate non-refundable “option deposit” to help motivate the buyer in a lease option to complete the transaction. In addition, Financial Web advises sellers to enter lease purchase agreements rather than lease options, as the purchase contract in a lease purchase may not require a refund of the deposit should the buyer walk away
Buyers and sellers have a number of options for accumulating down payment funds in lease option and lease purchase contracts. In addition to applying security and option deposits toward the down payment, many sellers also contribute a portion of the monthly rent payment toward the buyer’s down payment. In either type of transaction, the buyer may lose these additional funds if he does not purchase the property.
Both lease options and lease purchases allow sellers to unload properties in down markets while allowing buyers to check out a neighborhood while accumulating funds for a down payment. Lease purchases carry a reasonable amount of security for the seller that the buyer will complete the transaction, and lease options provide the buyer some flexibility to move out if unable to complete the purchase.
In either a lease option or a lease purchase, the buyer may lose a significant amount of money if he chooses not to complete the purchase process. In addition, the specific amount of any monthly rent payment that goes toward the down payment, according to Lease 2 Purchase, depends on the option or purchase contract; some sellers may be very generous with these contributions while others may contribute nothing at all. Finally, some sellers may expect buyers to perform their own maintenance during the lease period in preparation for home ownership.