Why Would You Sign a Lease-Purchase Agreement
March 23, 2018 by Marty Orefice | Contracts, Rent to Own
It may sound like lease-purchase and lease-option deals mean the same thing, but they definitely do not.
The Difference Between Lease-Option and Lease-Purchase
A lease-option is the traditional type of rent to own deal. The big difference between the two is that lease-option is a unilateral type of agreement; lease-purchase is not. Unilateral agreements mean that the seller has the obligation to sell the property to this buyer, while the buyer has the option to purchase it.
The seller cannot sell the property to anyone other than the buyer who signed the agreement before the end of the lease term – even if someone wants to purchase the property. Additionally, if the buyer wants to buy the property at any point throughout the lease term, the seller cannot refuse. The seller’s obligation holds true until the end of the lease term. Once the lease term has ended, the seller can sell the property to someone else, decide not to sell it or extend the buyer’s lease term.
On the other hand, lease-purchase agreements are bilateral. The seller’s obligation stays the same as it is within a lease-option agreement. The buyer’s obligation is what changes. In a lease-purchase agreement, the buyer is contractually obligated to purchase the property by the end of the lease term.
Lease-Purchase Drawbacks
As a seller, the drawbacks for lease-purchase are that instead of getting profit immediately from the sale of a property, the seller waits until the buyer purchases the property to receive the lump-sum profit. However, that is a drawback for both lease-purchase and lease-option.
For the seller, there are much more significant drawbacks. Mainly, buyers need to have their financing in order by the end of the lease term, or they could face significant legal liability.
In addition, buyers who don’t buy lose their option fee and any premium payments negotiated with the seller.
These aren’t drawbacks for the buyer if the lease-purchase is successful. Nevertheless, often times unexpected circumstances can complicate a buyer’s eligibility for financing. You cannot predict these circumstances. Therefore, many buyers prefer to sign up for lease-option agreements as opposed to lease-purchase agreements to avoid legal liability.
Lease-Purchase Benefits
One of the biggest fears that sellers face when they consider rent to own is the possibility that the buyer will not buy the property. Sellers fear that will leave them at square one.
The seller is not at square one in this scenario. The seller has earned money for months and possibly years from renting to the buyer. Additionally, the seller can still make a profit from selling the home. However, sellers who worry about having to do the work to find a new buyer don’t feel that same fear with lease-purchase agreements.
Lease-purchase agreements bind the buyer to purchase the home. Sellers have a guarantee that the buyer will buy. If the buyer cannot secure funding and is unable to purchase the property, the seller can sue for specific performance, which forces the buyer to find a way to purchase the property.
Therefore, the seller may push for a lease-purchase agreement, which is often the reason why buyers end up signing them.
Buyers opt to sign these agreements when they really want to rent to own. The guarantee of purchase often convinces a seller to agree to a rent to own program as opposed to traditional selling. They are also used to convince sellers to rent to own to a buyer who may not traditionally be a “safe” bet (i.e. people who have low credit scores, minimal option fees, long lease terms, etc.).
Why Would You Sign a Lease-Purchase Agreement
For a seller already interested in rent to own, there isn’t a reason not to sign a lease-purchase agreement. Lease-purchases are safer agreements for sellers than lease-options because they are bilateral – both parties are legally bound. On the other hand, only the seller is making legal commitments in a unilateral agreement.
As a buyer, consider your other options. If you have to have this property or if you don’t have any better options, signing a lease-purchase agreement may be the best way to get what you want. However, ensure that you can purchase at least six months before the end of the lease term. Those six months will give you wiggle room in case something goes wrong and should prevent you from inadvertently ending up in a legal mess.
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