Lease Purchase Agreements: Renting Today, Buying Tomorrow

Answer

A lease purchase agreement (also called a lease-option to purchase) combines elements of renting and buying, allowing tenants to lock in a future purchase price while living in the home today. This arrangement appeals to renters who want to build equity or secure a property despite current financial or credit constraints.

In a lease purchase agreement, the tenant-buyer and seller agree on key terms up front:

• Option fee: A one-time, non-refundable payment (typically 1–5% of the purchase price) that secures the exclusive right to buy within a set period.
• Lease term: Usually 1–3 years, during which the tenant pays rent, often at or slightly above market rate.
• Purchase price: Agreed in advance or determined by a formula tied to market value when the option is exercised.
• Rent credits: A portion of each month’s rent (commonly $100–$300) is credited toward the down payment or purchase price.
• Maintenance responsibilities: Tenant-buyers often assume more upkeep duties than in standard leases.

During the lease period, the tenant-buyer benefits from:

• Time to improve credit scores or save for a down payment
• Locked-in purchase price that may appreciate in a rising market
• Building equity via rent credits

However, there are important considerations:

• If the tenant-buyer chooses not to buy—or cannot secure financing—the option fee and accumulated rent credits are forfeited.
• Sellers may seek above-market rent to offset risk, and the tenant-buyer must understand state laws governing option agreements.
• Financing must be arranged by the end of the lease term; failure to obtain a mortgage means losing the option.

Before entering a lease purchase agreement, it’s advisable to:

• Review the HUD’s guidelines on homebuying and leasing options
• Consult a licensed real estate attorney to ensure compliance with state-specific regulations
• Work with a real estate agent experienced in lease-option contracts to negotiate favorable terms

Lease purchase agreements can be a strategic bridge between renting and owning, but they carry unique risks and costs. Prospective tenants are recommended to verify all terms in writing and seek professional advice before committing to this hybrid arrangement.