The Real Estate Encyclopedia
What Is A Lease Purchase Agreement And How Does It Work?
Category - Home Buying Questions - General Home Buying FAQ's

Under a lease purchase or lease-with-an-option-to-buy, an owner leases to a tenant a particular property and, in addition to paying rent and using the property, the tenant obtains the right to purchase it at a pre-negotiated purchase price over a fixed period.  Homes are often sold this way, especially when the real estate market is sluggish.  The lease is typically for one year and the option to buy must be exercised during that time but the parties have the right to negotiate the terms to satisfy their particular needs.

 

In a lease-option agreement, all the normal provisions of a lease and all the normal conditions of a purchase contract are present.  In addition, wording will be included stating the tenant has the option of exercising the purchase, as long as the tenant notifies the landlord in writing of that intent during the option period, as well as the amount (if any is agreed to) of the monthly rent which will be considered toward the purchase price of the property.

 

All terms of the purchase agreement must be negotiated and signed when the lease is signed.  Both the tenant and landlord must sign the lease.  In some states, only the landlord must sign the purchase and option agreement or contract, although both sides often do.  Once the tenant notifies the landlord in writing of his intent to exercise his option to buy the property, both parties proceed to carry out the purchase contract as in a normal sale.

 

Lease options are particularly popular during a soft real estate market, where a home seller is having difficulty finding a buyer but needs someone to occupy the property.  Thus, the homeowner defers the expense while still owning the home until the market stabilizes. Tenants find the lease-option attractive because it offers them the possibility to rent with the option to buy.  The tenant can wait up to a year (or the term of his option) and see if she/he likes the property and whether values rise or fall during their option term. 

 

The terms of a lease-option agreement are highly negotiable and may include incentives to the tenant to exercise their option as soon as possible, e.g. applying part or all of the rent paid toward the purchase price if the option is exercised within a certain period.  The seller can also charge the tenant extra for the privilege of having the option but the terms must make economic sense to the tenant.

 
Category(s)
Home Ownership Questions - Lease & Renting FAQ's
Home Buying Questions - General Home Buying FAQ's
Real Estate Information Sources - General Real Estate Information
Home Selling Questions - General Home Selling FAQ's
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