Lease Purchase - The Workings of the Contract

Buyers and sellers are free to write almost any clause they want to into a lease purchase agreement as long as they stay within their state laws. It's always a good idea to have a real estate attorney involved with your first several lease purchase agreements.

With a lease purchase, the seller and the future buyer typically agree on the future price of the house. One option is to set the price at today's market value with an inflation or market escalation clause tied to a reliable and specific index. It's common for the purchase price to be about 10% above market value.

Lease purchase offers the seller the highest sales price, a high option payment, the highest rent, and the least expenses. Lease purchase is the way to go.

The next major step in setting up a lease purchase agreement is establishing the cost of the option. Some sellers include the option price in the down payment if the buyer exercises the purchase option. Most don't. The option price in a lease purchase is substantial. This is how the buyer gets skin in the game and is a major motivator to completing the entire lease purchase.

Lease Purchase Benefits for the Buyer

The buyer in a lease purchase arrangement gets to 'test drive' the house, the neighborhood, and the school district. Depending how the contract is written, the buyer may have the price locked in for years in a rising market. This isn't a bad thing for the seller because the more value the buyer has in the property, the more motivated they become to complete the lease purchase process. If the market falls to far the buyer will walk away.

Although the option money doesn't usually apply towards the down payment, a portion of the rent normally does. This benefits both the buyer and the seller. In today's world, many people find it almost impossible to save money towards a down payment. Having part of the rent go towards the down payment is a way of forcing a buyer to make it happen. For the seller in a lease purchase, applying a portion of the rent towards the down payment is no big deal because the rent is set above market value. It's all upside for the seller. If the buyer doesn't execute the purchase, the seller keeps all of the above market rent. If the seller does go through with the lease purchase, the seller has sold the house at an above market price and collected the option money up front.

While technically the buyer is required to make the purchase in a lease purchase agreement, it's important for the seller to be reasonable. If the buyer walks away, it's likely because they can't afford to make the purchase or can't qualify for a loan. The seller may feel they want to compel the buyer to complete the purchase but it's probably unreasonable to do so. It's better to accept that you've made a bundle in option money and high rent and just start the lease purchase process over again with a new buyer and new option money.

Learn from my more than 20 years of experience in the real estate investing business including specialized lease purchase training at wendypatton.com.