The Pros and Cons of a Lease Purchase Agreement

If you are looking to buy a home and your credit score is poor or you don’t have adequate funds for a down payment, your financing options may be limited. Obtaining a mortgage through traditional means can be difficult or even impossible. A lease purchase contract is one alternative that may facilitate a purchase when the buyer cannot secure a mortgage from a lender.

The Basic Structure of a Lease Purchase

In a lease purchase contract, the buyer and seller agree to a lease period followed by sale of the property when the lease ends. This type of agreement combines both a lease and a purchase with the tenant/purchaser securing the option to purchase the house. The renter pays a deposit at the outset in exchange for the subsequent option to purchase. The right to purchase the home at the end of the lease belongs exclusively to the renter. A portion of the rent is used for a down payment later on, but the renter is responsible for securing financing for the purchase once the lease ends.

Considerations for a Buyer

A lease purchase provides one avenue to acquire a home if the buyer cannot obtain a mortgage. The renter can use the time during the lease phase to improve his credit score prior to purchasing the home. If the house increases in value during the lease period, the buyer also gets the benefit of the additional equity. However, the renter/buyer must make regular monthly payments. If he is having difficulty making a payment, the arrangement can be terminated by the seller. Moreover, some contracts contain clauses that provide that delinquent payments are not applied toward the down payment. The buyer must also have some confidence that he will be able to obtain financing at the end of the lease to purchase the home. If the renter fails to secure financing, he may lose the extra cash he paid toward a down payment.

Considerations for a Seller

A lease purchase agreement may be attractive to a seller in a competitive market since he is able to lock in a buyer and secure a monthly payment. The seller is typically able to charge a higher rent than he would normally receive in a traditional lease. At the same time, a seller who wants access to a large sum of cash will not receive those funds in a lease purchase. If the value of the home increases once the lease has ended, the seller cannot realize the increase in value since the parties are generally locked into a purchase price. Of course, the biggest disadvantage is that lease purchase agreements are multi-year contracts. This carries a certain degree of risk and uncertainty that many sellers may choose to avoid.

The experienced team of attorneys at the Law Offices of Mark Weinstein, P.C. can help you litigate your real estate claims. Contact Mark Weinstein and his colleagues at (770) 888-7707 or visit the contact page to find out how they can advise you.