How To Structure A Lease Purchase Agreement
Lease purchase agreements often include two distinct contracts: one for the lease agreement and the other for the end-of-lease sale. These two different contracts will include cross-default provisions that make certain clauses mutually exclusive. That is, if you breach one provision, such as missing a monthly payment, it may trigger an automatic breach in the purchase contract.
1. Set The Lease Period
The lease should outline how long the lease period will be and the monthly rent amount. Lease purchase agreements will often have a longer period of time for the lease, typically up to 3 years.
2. Include Special Clauses
The lease agreement will include all the standard elements of a traditional lease along with a few special clauses, such as requiring the tenant/buyer to pay for maintenance costs, property taxes and insurance fees.
Some common special clauses to look out for include the option fee amount, purchase price and down payment. Both parties will agree to an option fee, which legally binds the landlord to sell the property to the tenant at the end of the lease even if the landlord or tenant changes their mind. Such an agreement comes at a cost. The option fee can be any amount and is nonrefundable.
3. Allocate Portion Of Rent To The Down Payment
This portion of the agreement will also typically allocate a dollar amount of rent that’ll go toward a down payment. Let’s say a renter is paying $2,000 a month on a $250,000 home, and $400 per month goes toward a down payment. At the end of a 24-month lease, the buyer has the option to use $9,600 as a down payment of 3.8%, just above the minimum for most mortgages. If the buyer decides the house isn’t for them and backs out of the sale, they forfeit the down payment.
4. Include A Contract Of Sale
This section will outline the purchasing process and terms once the end of the lease period has arrived. No matter how long the lease term is, both parties will agree on a purchasing price (based on fair market value) at the time of the rental agreement. Often, the purchasing price will be higher than the market value to account for appreciation. No matter which direction the market fluctuates, both parties are bound to this agreed-upon purchasing price.
The buyer will be responsible for securing a mortgage loan on the property. If the tenant was unable to qualify for a mortgage before signing a lease purchase contract, they’d be able to share their agreed-upon down payment timetable with the lender as leverage for a better deal. At the end of the residential lease, the lender will send the funds to the seller to transfer the title.
5. Have A Professional Review Your Contract
It’s highly recommended to have a real estate attorney review this type of agreement before you sign it. While most often the agreements will nullify the contract of sale if the buyer can’t secure financing, some will require full repayment whether you can afford to or not. That’s why it’s usually a good idea to seek legal advice when entering into any kind of real estate purchase agreement.
