Buying a home typically involves the transfer of title after both buyer and seller agree to the terms of the contract and sign off on the deal. However, there are other ways for buyers to become homeowners, including through a Lease Option or Lease Purchase agreement.
Both concepts are often used interchangeably, but there are significant differences between the two. Depending on your particular situation, one might be the better option over the other.
With a lease purchase agreement, a renter is allowed to occupy the property for a certain amount of time while paying monthly rent to the owner. During this time, the renter is obligated to take care of the property and maintain it according to what is stipulated in the agreement.
With a lease purchase arrangement, the renter promises to purchase the property by the time the contract expires. The sale of the property will be scheduled to occur with a written contract in place, and the price that is paid will be determined at the time that the contract is signed by both parties. Should the renter fail to purchase the home, they will be deemed to be in breach of the contract and the seller has the right to take legal action.
In the majority of lease purchase contracts, the tenant gets a credit that is put towards the purchase price of the property. This money goes to the owner and is usually non-refundable.
Much of the terms of the lease purchase agreement also apply to a lease option. The renter lives in the property while paying rent, and agrees to take care of the home while living there. However, that’s typically where the similarities end.
The biggest difference between these two arrangements is that the tenant is not obligated to buy the home once the contract expires. Instead, they are only buying the right to purchase the property, as opposed to making a promise to buy as is the case with a lease purchase. If the tenant decides to buy the property, they must exercise this right before the contract expires. In this case, the property owner must sell to the tenant.
Earnest Deposits in Lease Purchase and Lease Option Agreements
Both options require the tenant to pay an initial payment to the seller, which is typically higher than the usual security deposit that would be required with a traditional lease. In the case of a lease purchase, this money is referred to as “earnest money.” As in a traditional purchase agreement, this deposit money is usually not refundable if the tenant breaches the contract in some way.
Under a lease option, this upfront money is referred to as the “option consideration” and is typically a non-refundable premium that’s given up in exchange for the option to buy. This gives the property owner some recourse should the tenant choose to walk away once the contract ends. For this reason, a lease option is more commonly used by investors who can make additional income from this premium.
Lease purchase agreements are more common than lease options for homebuyer hopefuls who are serious about buying but are met with certain financial hurdles, such as poor credit or lack of an adequate down payment. A lease purchase gives buyers like these the opportunity to live in the home right away while they’re working towards improving their financial situation.
The Bottom Line
Both a lease option and a lease purchase could be viable options for buyers who may be struggling with credit issues that are preventing them from becoming homeowners the traditional way. These approaches are even beneficial to sellers in that they can often charge higher rent in exchange for more flexible financing terms, and can even command a higher sales price for the property in question.
Either way, the decision to opt for a lease option or lease purchase should only be made after working with an experienced real estate agent who can show you all of your options before choosing one that’s right for you.