Lease Option vs Lease Purchase

Buying a home through rent to own contracts has become more popular in recent years and there are two basic platforms that are most often used in these scenarios; a lease purchase or a lease option. While they are similar, there are some big differences that may affect your decision in choosing which is right for you.

Lease Option – This option is simply a lease agreement that gives the tenant an option to purchase the property before or by the end of the lease period. The specifics can vary depending on the two parties involved.

Lease Purchase – This option is a rental agreement that has a sales contract included in the lease. This type of agreement stipulates that the tenant will purchase the property at the end of the lease. Unlike a lease option, the sale is already agreed upon in a written contract rather than being optional.

Lease Option Pros

• Easy to Qualify – Qualifying for a mortgage with a bank is more difficult than ever. Conventional lenders require credit scores, debt to income ratios, employment history, etc. With a lease option, the seller decides on the guidelines and they can be as strict or lenient as he or she wishes. In most instances the main factors may be payment of the option fee (if required), previous rental history, and monthly lease payments.
• Immediate Occupancy – With traditional forms of financing, it may take weeks, or even months, before you can move in. Lease options allow the buyer to move in immediately after paying an option fee and lease payment.
• Trial Period – While the option fee represents a partial commitment, the buyer has the benefit of a trial period before the final purchase. If the buyer finds the home to be unsatisfactory, they can opt out of the purchase at the end of the lease agreement.
• Build up credit or save for a Down Payment – Down payments on a home can be up to 20% of the purchase price. With a lease option, the option fee may be applied to the down payment, but will be substantially less than would otherwise be needed. The duration of time in the lease agreement may also allow you to build your credit score and enable you to get financing when the time comes to finalize the purchase.
• No Obligation to Purchase – The lease option means only that you have the first option to purchase the home, not that you must. In this way, lease options favor the buyer rather than the seller because the seller is obligated to sell you the home if you want it.
• Sales Price may be Higher – In many cases, buyers who have cash to offer will pay a substantially lower price than those who opt for a rent to own agreement. The price is always open to negotiation, but sellers often want more for the inconvenience of waiting longer for the actual sale to occur.
• Lease Termination – Buyers should consider the potential for their lease to be canceled when entering into lease option agreements. Things such as late payments, etc. can give the seller reason to cancel the lease and the option fee will almost certainly be lost.
• Rent is often higher than Normal – The monthly rental fee paid each month may be higher than other rents in the area. If the buyer chooses not to purchase the property at the end of the lease, he or she will have paid much more in rental fees than if they had simply rented a home.
• Option fee may not be refunded – At the end of the lease period, if the buyer doesn’t choose to purchase, the option fee will most like not be refunded. If the option fee wasn’t a significant amount, it might be comparable to losing a security deposit, but in most cases it is much higher than the normal rental deposit.
• Potential encumbrances to the Title – Buyers must be wary of title encumbrances when choosing this option. If there are liens, etc. against the property, it can cause significant problems when the final purchase is being made. No matter which option you choose, it is wise to have a title company or lawyer verify that the title is free of encumbrances.

Cons

Lease Purchase

A lease purchase agreement has the same basic advantages as a lease option agreement. The main difference is in that the buyer has already signed a sales contract which obligates them to purchase the property at the end of the lease. This is often used by potential buyers who need to resolve credit issues before applying for a mortgage loan, as well as those who are saving money for the down payment. Lease purchase agreements often require a larger fee up front than lease options, but in many cases it will be applied to the down payment or the purchase price of the home.

Both options have advantages and disadvantages and which will better serve your purpose depends on the individual circumstances. The details of each particular contract are as widely varied as the buyers and sellers themselves. Whether you choose a lease option or a lease purchase agreement, the end results will be the same; the chance to own a home for those who may not be able to do so by traditional means.