Jim Kimmons is a real estate broker and author of multiple books on the topic. He has written hundreds of articles about how real estate works and how to use it as an investment and small business.
Updated on August 31, 2021 In This Article In This ArticleA lease purchase is a written agreement between a landlord and tenant, giving the tenant an option to purchase the property at some future point in time. The nature of this type of real estate transaction can vary a great deal, because virtually all the terms of a lease purchase are negotiable. For example, they may or may not include a set price. When they do, the price might be the appraised value of the property at the time of purchase or another agreed-upon value.
Learn more about how lease purchase payments work and the advantages they have for both tenants and sellers.
Generally, the seller will want the tenant to give a non-refundable payment in advance to "purchase" the option to later buy the property. This is called an "option" payment, and it can be any amount. It "locks in" the tenant's option to purchase, even if the landlord later has a change of heart.
Along with the purchase price, the lease agreement sets the size of the down payment and the timetable for making it. The parties can agree to a portion of rents paid going toward this down payment. Of course, this would typically mean an increase in the amount of rent each month. But some buyers might prefer it as a method of forced savings toward a down payment.
Advantages for Tenants | Advantages for Sellers |
---|---|
Time to qualify for a mortgage | Increased return on investment |
Time to save for a down payment | Locked-in sale price |
Don't have to move when lease ends | Attracts responsible tenants |
Personal investment | Keeps home in good condition |
There are several reasons why someone might want to lease a home with the option to purchase it later.
In each of these cases, having the option to purchase at the end of the lease helps ensure a smooth transition from tenant to new owner. And if the tenant decides they don't want to purchase the property at the end of their lease, that is OK, too.
Lease purchase arrangements can benefit owners of rental properties as well.
If you're a landlord, a lease purchase agreement can help ease some of the most common concerns about owning a property: finding great tenants, keeping the home in good condition, and eventually selling the home for a price you're happy with.
If you're a homeowner stuck with a home that isn't selling, and you must move for some reason, or if you're a real estate investor with multiple properties, a lease purchase might be a viable option for nailing down a sale and getting a good price for your property. If you've lost a home, have credit problems, or just can't get a down payment together in a short period of time, a lease purchase can work for you as a tenant as well.
Whichever side of the lease-purchase agreement you're on, the deal can be a win. But since all the aspects of this private deal are up to the individual parties, consider your needs and interests carefully when hammering out the terms.
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
agent stands nearby." width="282" height="188" />
When Can a Tenant Legally Break a Rental Lease? When a Landlord Can Keep the Security Deposit Sample Rent Increase Letter for Monthly Tenants A Breakdown of Property Management Fees 10 Common Reasons Renters Move Pros and Cons of Investing in Stocks Is It Possible to Make a Living Off Stocks? Annual Stock Market Returns by Year Pros and Cons of Airbnb as an Investment Strategy 10 Best Vanguard Funds to Hold for Long-Term Investing The BalanceWe and our 100 partners store and/or access information on a device, such as unique IDs in cookies to process personal data. You may accept or manage your choices by clicking below, including your right to object where legitimate interest is used, or at any time in the privacy policy page. These choices will be signaled to our partners and will not affect browsing data.
Store and/or access information on a device. Use limited data to select advertising. Create profiles for personalised advertising. Use profiles to select personalised advertising. Create profiles to personalise content. Use profiles to select personalised content. Measure advertising performance. Measure content performance. Understand audiences through statistics or combinations of data from different sources. Develop and improve services. Use limited data to select content. List of Partners (vendors)