Monday, June 29, 2009

What is a lease to own?

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 1-2 years, at an agreed-upon price. Upfront, the borrower will pay 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 buyer decides not to purchase, then the buyer loses both the option fee and the rent premium.

Contract Features of a Lease-Purchase:

The sale price of the house and the rent are market-determined, yet subject to negotiation just as in a straight purchase or rental transaction.

To the buyer, the option and rent premium are part of the equity in the house they will soon own. If they buy, the only cost is the interest they would have earned. To the seller, these payments are the best guarantee that the buyer will exercise their option to buy after the lease agreement is completed. If they do not go forward with the purchase, these payments are retained as income. In the lease interim, the seller still gets the tax benefits of home ownership.

A lease purchase also may give the renter/buyer the right to assign the option to buy. This will usually have considerable value to the buyer, because it means that the option can be sold in the event that it has value but the buyer is not able to exercise it. It is a cost to the seller for the same reason.

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