This information is provided generally and is not specific to a particular property. A lease purchase option on any rental agreement will consist of the following:
- A Term: usually 1-3 years.
- A Purchase Price: this is set in the contract now and should reflect the reasonable value of the home at the end of the Term, usually today’s value plus some annual percentage increase.
- An Earnest payment: this is a cash payment, usually 5% of the Purchase Price, paid by the tenant upon entering the Lease Purchase and goes toward the eventual Purchase Price but is non-refundable should the tenant not follow through with the purchase.
- An additional monthly rent payment: this is an amount added to the monthly rent that goes toward the eventual Purchase Price but is non-refundable should the tenant not follow through with the purchase.
Upon entering the Lease Purchase Option, the tenant is effectively committing to purchase the house at a later date at a predetermined price. As a result, the tenant usually becomes immediately responsible for all repairs and maintenance of the home – something the landlord would typically handle in a straight rental arrangement.
It can be a great option for someone to purchase a home that immediately does not have the cash or credit to buy today. It can also be a good way to be certain it is the home you want to buy before actually buying it. The risk can be in pre-determining the purchase price (both for the landlord and the tenant) and/or not following through with the purchase (you would forfeit your Earnest payment and any additional monthly payments).