A Guide to Writing a Lease-Purchase Agreement
A lease-purchase agreement is usually the only solution that tenants with poor credit scores have to buy a home. Besides being useful for tenants who need time to build a good credit score, the contract is also beneficial to landlords looking for a long-term tenant.
Key Aspects of a Lease Purchase Contract
By signing a lease-purchase agreement, the tenant and the landlord agree that the property will be sold to the tenant in question once the lease ends. The agreement—also known as a rent-to-own contract—consists of two documents:
- Residential lease—allows the tenant to rent a property for a certain period (usually up to three years)
- Contract of sale—obligates the signing parties to fulfill the terms of the lease-purchase agreement after the lease expires
A lease-purchase contract includes a set price of the property that can’t be modified even if the property’s value changes in the meantime. Since a portion of the tenant’s monthly rent usually goes towards the previously agreed-upon down payment, the rent is higher than the market share. The tenant will also have to pay insurance, property taxes, and maintenance costs.
Some landlords will also require a lease option—a non-refundable monthly fee that allows the tenant to “buy” the option to purchase the property. The lease option agreement obligates the landlord to sell the property. If the tenant gives up on the purchase, the landlord keeps the lease option money.
How Can a Lease Purchase Agreement Protect the Tenant and the Landlord?
Both the tenant and the landlord can benefit from the lease-purchase agreement:
|Benefits for the Tenant||Benefits for the Landlord|
|The rent-to-own agreement is beneficial for the tenant if he or she:
||The rent-to-own-agreement is beneficial for the landlord if he or she wants to:
Can You Write a Lease Purchase Contract Yourself?
Whether you’re a tenant or a landlord, writing a lease-purchase agreement on your own can be risky. Hiring an attorney is the safest option, but not everyone can afford it.
If you’re on a budget, you can take a look at a few contract templates online to get an idea of how to draw up a lease purchase agreement. While the templates won’t fit your situation to a T, they could help you learn how to structure the agreement. They can also show you which legal terms to use. If you can, you should at least pay a lawyer to review the contract once you write it.
Learn How To Structure a Lease Purchase Agreement
To make a valid lease-purchase contract, you’ll need to draw up both the lease agreement and the contract of sale.
Residential Lease Agreement
The lease part of the agreement should look like a regular residential lease contract with a few additional clauses. These are the common details you should include:
- Length of the lease period
- Rent amount
- Lease option fee amount
- Purchase price
- Down payment
- Percentage of the rent that will go toward the down payment
- Additional responsibilities of the buyer, such as paying:
- Maintenance costs
- Property taxes
Contract of Sale
The contract of sale should:
- Outline the terms of purchase after the lease period
- Include the purchase price based on the property and market value
- State that the buyer is responsible for getting a mortgage on the property
Should the loan be approved, the lending company will transfer the funds to the landlord once the lease period is over.
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