What's Involved with a Lease Purchase?

Doing a lease purchase/rent to own transaction means that you are ready to take the first step to home ownership. You are tired of renting and want to stop throwing money away every month, but your current credit or job situation will not allow you to get a mortgage.

You saw the ads for rent to own homes, also known as lease to buy, and you wonder if it is the right decision for you. There are certain things you need to consider before making a lease purchase decision. The most important being what your credit score is right now.

Option Down Payment

In a lease purchase transaction you will be required to do an option down payment. This down payment is known as option consideration and will be applied to your eventual purchase price, or closing costs on the mortgage. Your lease purchase contracts will have two parts to it: a lease contract, and an option to purchase contract.

The option down payment is to secure the option to purchase. You are essentially tying the property up so that the owner can sell to no one else but you at any time during the lease period. In return for the owner taking the property off the market and letting you tie it up, you are paying the option down payment, which is why it is non-refundable.

What are the Benefits of Renting to Own?   

If you are in the market to buy a home, you are probably aware of the advantages home ownership provides (tax shelter, appreciation, security, etc). If you are actively seeking homes for sale on a Rent to Own (also known as Rent to Own) agreement, you are either

1. a very smart renter,

2. a very smart real estate investor,

3. not ready to make a commitment,

4. cannot yet purchase a home through conventional means, or

5. any combination of the above. 

The Rent to Own approach provides you with many features and benefits, but perhaps the most powerful one is the rate at which you accumulate equity. Compare any lender's loan amortization schedule to that of a Rent to Own contract and you'll quickly see that the Rent to Own contract wins hands-down -- every time. Moreover, the buying power of a Rent to Own contract can quickly and easily land you a home that you could only dream of buying the conventional way. 

Features and benefits for the tenant/buyer: 

• Faster equity growth: Equity accumulates much faster (five times or more!) than with conventional financing through a bank or lender. 
• Rent money is working towards purchase: Every month a portion of your rental payment (typically $100-$500) is credited towards your down payment or off of the sales price.
• Option money is credited towards purchase: When you sign a Rent to Own contract, you will pay the seller an option deposit. This money is your vested interest in the home and will be fully (100%) credited to you when you buy the home.
• Minimum cash out of pocket: When you purchase a home the conventional way, you must pay at least 5% down plus closing costs and prepaid fees. When you buy with a Rent to Own, you only pay first month's rent and a small option deposit. This will save you between 25% and 85% every time you buy a home.
• Frequently no down payment at close: Since you have given the seller an option deposit and you have been receiving monthly rent credits, there will frequently be very little or nothing left to pay for a down payment at closing.
• Profits from appreciation: Since the sales price is locked in before closing (as specified in your agreement), any increase in property value will mean that your equity (what you owe minus what it's worth) is increasing in the home.
• Possible sale for a profit: If you are allowed to sell (assign) your option (it will be in your agreement), you may sell it to a third party for a profit.
• Increased buying power: When you buy a Rent to Own home, you can put down as little as first month's rent and a $1 option deposit. Compare that to a typical bank or lender who requires 5-30% down plus closing costs and prepaids.
• Credit problems okay: Qualification restrictions simply do not exist. You will be approved at the sole discretion of the landlord/seller.
• No lengthy escrows or mortgage approvals: Your approval will be based solely at the discretion of the landlord/seller instead of a lender who can take up to a month (or longer) to render a decision.
• Control of the home: You will be put in full legal control of the home for a specified period of time without actually having to own it.
• No taxes, less liability: Since you do not own the home (yet), you will not have to pay property taxes and your liability exposure will be dramatically reduced.
• Quick move in time: You can typically take possession of the home in a week or less, instead of conventional move in times of one to three months, after your offer was accepted.
• Maximum leverage: You are spending very little (or zero) money to control a potentially very expensive, and very profitable, piece of real estate.
• Time: Before you actually buy the home, you will have 3-24 months (depending on your agreement) to repair your credit, find the best interest rates, investigate the home and research the neighborhood and/or schools.
• Minimal maintenance: Large maintenance problems or any maintenance problems that exceed a certain amount of money can be delegated to the landlord/seller.
• Privacy: Your name will not be on the deed or in the public records until you exercise your option to buy.
• Peace of mind: You will have full control of the home and can maintain or improve it however you wish.