What is a Rent to Own?

or What is a Lease Purchase?

A Rent to Own, or Lease Purchase is basically a rental or lease and a purchase agreement (combined or separated) between the tenant/buyer (lessee) and the seller/landlord (lessor) with the choice, option, or right of the tenant/buyer to buy the property or control certain terms of an agreement while the property is being rented.

Lease Purchase has several names, but when you hear these names keep in mind that they all refer to the same thing, the same concept, and the same lease purchase. Here are some of the names of Lease Purchase: lease to purchase, lease with an option to buy, rent to own, lease purchase, lease option, lease to own, lease with an option to purchase, etc.

Lease Purchase is great for investors or first time home buyers in many ways. For example, a tenant/buyer or an investor can control a property without actually owning it yet. On the other hand, sellers and landlords also benefit tremendously.

For example, seller/landlords can now move their properties within days or weeks instead of the usual months of vacancies and unsold property listings. We will go through all your benefits later no matter which category you fall in so keep reading. Whether you are a renter, buyer, seller, landlord, investor, or a realtor®, you can benefit from our Residential Lease To Purchase Information.

If set up properly, Lease Purchase/Lease Option can solve many of the problems related to buying, and investing in real estate. Hence, Lease Purchase is one of the best, if not the best way to control real estate.

With a Lease Purchase, seller/landlords can rent and sell their properties safely and profitably, and tenant/buyers can rent to own them, all on pre-negotiated terms. Tenant/buyer can have all the benefits of home ownership and control without many of the hassles and liabilities. Seller/landlord now has a great tenant and potential buyer in the near future.

Q. What Is a Lease-to-Own Purchase?

A lease-to-own house purchase (also "rent-to-own purchase" or "lease purchase") is a lease combined with an option to purchase the property within a specified period, usually 3 years or less, at an agreed-upon price. The borrower usually pays an option fee, 1% to 5% of the price, which is credited to the purchase price. The borrower pays rent, and an additional rent premium that is also credited to the purchase price. If the purchase option is not exercised, the buyer loses both the option fee and the rent premium.

As with any kind of financial contract, lease-purchase deals can be structured in such a way that all the benefits flow to one of the parties and none to the other. Buyers especially need to be careful. But lease-purchase plans have a solid economic rationale, which means that they can be structured so that both parties benefit.

Q. What are the Contract Features of a Lease-Purchase

A lease-purchase has five major components. The sale price of the house and the rent are market-determined, but subject to negotiation just as in a straight purchase or rental transaction. Buyers often know less about the market than sellers, which places buyers at a disadvantage unless they do some homework, which is advisable.

Buyers generally prefer a long option period of greater than two years because it provides more time for them to build equity and repair their credit. A long period can backfire on them, however, if they are never able to exercise the option, since they lose the rent premium they have been paying all the while, in addition to the option fee. Sellers generally prefer a short option period, but if it is too short, the house will not get sold.

The option fee and rent premium are viewed differently by buyers and sellers. To the buyer, they are part of the equity in the house they will soon own. Fully anticipating that they will exercise the option, the only cost is the interest they would otherwise have earned. To sellers, however, these payments are the best guarantee that their houses will sell; if they don’t sell, the payments are retained as income. That the benefit to the seller generally exceeds the cost to the buyer makes the lease-to-own deal a possible win-win. 

Q. Using a Lease-Purchase to Buy

The lease-purchase offers homeownership opportunities to consumers with little cash and/or poor credit, who are prepared to bet on themselves. The bet is that before the option period expires, they will qualify for the mortgage they need to exercise the purchase option. During the option period, they have the opportunity to rebuild their credit and accumulate equity while living in the house.

The development of the sub-prime market, in which consumers with poor credit or no cash can obtain loans, does not seem to have lessened interest in lease-purchase. It is very likely that those who succeed in exercising their option under a lease-purchase do better than if they had financed a conventional purchase in the sub-prime market. The savings in finance costs will more than offset a higher price on the house. But those who can’t exercise their option will lose their bets.

Consumers who need to rebuild their credit rating during the option period should understand that paying their rent on time won’t do it. Rent payment information is not used in compiling credit scores. While Fair Isaac, the company that developed credit scoring, has recently unveiled an “expansion” score based on “non-traditional credit data,” it does not yet include rent payment information from individual home owners. Lease-purchase buyers who need a higher credit score must focus on their credit cards and loans.

Even though it is costly, the right not to exercise the option is of value to buyers. If there is something seriously wrong with the house, neighborhood, or neighbors, the money left behind on a lease-purchase is much smaller than the cost of an outright purchase followed by a sale.

Q. What are the Concerns for Buyers

On October 2, 2005, Bob Mahlburg, an investigative reporter for the Sarasota Herald-Tribune, published an article on a substantial lease-to-own program in Florida that had generated numerous complaints. Over a 5-year period hundreds of deals were executed under this program but only a handful of purchases. In fact, there were more evictions than purchases.

The contract used in this program made it all too easy for the seller to avoid having to sell when it was more profitable to evict the tenant and do another deal with another hopeful buyer. The moral: read the contract very carefully to make sure you are confident you can live up to all the terms, such as paying your rent on time, every time.

Q. Using a Lease-Purchase to Sell

Most home sellers want a cash sale, but for those prepared to hang on to the property a while longer, the benefits can be favorable.

First of all, the deal may fall through, but in that case the seller gets to pocket the option fee and rent premium. The seller also enjoys the tax deduction on his mortgage interest payments during the option period.

• Top sales price for your property (no haggling)
• Stops the money hemorrhage of mortgage payments. 
• All maintenance is delegated to us the tenant buyer. This eliminates 2 AM phone calls. That means someone is living on-site to watch your property guard against vandalism, fire danger, etc. That's like having a security guard living in your house who pays you - rather than you having to pay them! 
• You remain on the deed - it's still your property until the option is exercised. 
• You continue to enjoy all the tax advantages (check with your tax advisor on this). 
• It puts a new occupant (tenant buyer) into the property in days or weeks, rather than having to wait 45, 60, or 90 days, which is typical with conventional financing. 
• It saves you a lot of money by not having to advertise the property. 
• There are no fees to pay (especially the six to seven percent realtor commissions). 
• It helps you to qualify for new financing on your next home. 
• We don’t care what kind of mortgage you have (assumable, non-assumable etc.)
• Your insurance could be canceled if you home sits vacant for more than 30 days.