Within real estate, certain contracts exist to allow tenants to transition from renters to full property owners: lease purchase and lease option. Despite their distinct differences, potential buyers often confuse the 2 agreements as the same contract since both help renters establish the means to close on a property sale. Without knowing each contract’s guidelines and purpose, though, renters could miss out on certain benefits, or worse, be bound to an unfavorable agreement. Let’s discuss the characteristics and differences between lease purchase vs. lease option to decide which agreement suits your homeownership goals.
Lease Purchase Agreement
Lease purchase agreements are essentially rent-to-own contracts set between a landlord and tenant, wherein the latter can legally buy the property at an agreed price to take ownership in the future. Rather than just a single contract, though, lease purchases typically include 2 contracts:
- Residential Lease, which gives tenants a property lease that ends at a certain period or until the point of sale.
- End-of-Lease Sale Contract, which stipulates both owner and potential buyer to residential purchase agreement terms and transfers ownership once the residential lease ends.
Along with rent, lease purchase contracts also outline the buyer’s required payments towards maintenance, property taxes, and insurance fees. Though these agreements can customize the tenancy period depending on negotiation between landlord and renter, most leases only extend to 3 years.
Lease purchase agreements are a frequent choice for first-time home buyers as they offer the benefits of building up a down payment or credit score to better purchase a home, avoid moving costs and high prices within an unstable housing market, as well as the potential to earn equity for a mortgage on a permanent home. Current property owners looking to sell to renters likewise benefit from lease purchases for the ease in drawing in reliable property tenants, direct transference of ownership after closing, freedom to set property price, and ability to keep the established down payment should buyers back out of the contract.
Even though lease purchase agreements are favored by both parties, property owners can revoke these terms from potential buyers if at any time the contract is breached. For this reason, potential buyers should avoid missing payments, damaging the property, or inability to secure a mortgage.
First-time homebuyers can build their finances for a down payment while renting using a lease agreements.
Lease Option Agreement
Lease option agreements—though similar to lease purchase—are contracts that allow renters to buy the property at the agreed price during or at the end-of-lease period. Hence, the lease gives renters the “option” to buy anytime, only requiring that the owner be prepared to finalize the sale to only the said tenant. If renters have not taken the option to purchase before the term’s end, they are forced to either pay or break the agreement.
Although most lease option prices are set upfront at the home’s current value along with a 1% fee of said price, the flexibility of payment and time allotted in the lease allows buyers to build their savings and purchase the property later on without worrying about added interest.
Furthermore, lease options are quite useful for buyers looking to save up for a down payment on the property. During the lease period, a renter’s upfront fee and portion of rent can go towards a down payment on the home, guaranteeing a purchase as the home is contractually promised on the landlord and thus removed from market listing. However, it is worth noting that regardless of the agreed amount, the lease option fee is nonrefundable; in turn, should buyers decide against purchase, the accumulated down payment cannot be refunded.
Truthfully, lease option terms highly benefit sellers by enabling them to set their own market price and collect premium deposits on their home in a contractually binding home sale. Even cases where the renter defaults from the lease option agreement, owners can collect sizable upfront and down payment sums as penalties for breaching contract, allowing the home to be listed once more and perhaps receive better offers than before the contract was set.
Finish Your Closing with Metropolitan Title
No matter if you choose a lease purchase vs. lease option agreement, renters can rest assured of securing their dream home through such contracts. Flexible, direct and determined to transfer ownership, both buyers and owners can meet their goals through such real estate contracts without breaking the bank for moving costs or market inflation.
When drafting your lease purchase or lease option contract, though, ensuring you receive full credit as the property owner is crucial. We at Metropolitan Title cover such concerns as our escrow and title team work to ensure you close on your property’s title from risk of theft or fraud in such agreements. To check out our Title Insurance services and resources, contact our Metropolitan Team today.