What is a Lease Purchase Contract (Option)?
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A lease purchase contract combines a basic lease contract with an option-to-purchase contract. The tenant/buyer pays to the landlord/seller a nonrefundable option deposit, which gives the tenant/buyer the "option" to buy the home at the end of the lease, making up for the difference in negative rent should the potential lease-purchaser not be able to perform. The tenant/buyer then pays to the landlord/seller rent to compensate the landlord/seller for the tenant/buyer's use of the property. Rent payments are usually made on a monthly basis. That monthly payment is applied to the monthly mortgage payment or the investor basically advancing his funds towards the property of the future home owner. During the term of the lease, but before the option expires, the tenant/buyer has exclusive right to buy the home under the terms to which both parties have previously agreed. The Lease-purchaser is choosing a home while the investor provides credit and funding. Lease Purchase agreements, since they combine the terms of a real estate purchase agreement with a residential lease, must contain all the required elements for real estate contracts, as well as the following provisions:
1. Option Price: For an option contract to be enforceable, the buyer must pay for the option. The amount paid for the option is not refundable and gives the tenant/buyer the "option" to buy the home at the end of the lease.
2. Option Term: The contract should contain a specific date by which the buyer must exercise the option.
3. Method of Exercising the Option: The contract should specify what actions the buyer must take to exercise the option. This is often simply a letter to the seller stating the buyer's intent to purchase the property.
4. Buyer's Credits: If a portion of the rent payments is to be applied to the purchase price of the home, this should be stated clearly in the contract.
Is there a mark up on the house when I exercise my option?
Yes. The mark up is below the current appreciation trends (currently 15% per annum). Although no-one can predict the appreciation for the housing market, Phoenix has shown a steady performance regarding this issue. |
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