Thinking About a Lease-Purchase?

Not every path to homeownership starts with a mortgage application. If your credit needs another year to season, or you're saving toward a down payment while you get settled in a home you already love, a lease-purchase agreement can look like an appealing middle step. Before you sign one, it's worth understanding exactly what you're agreeing to, because a lease-purchase is really two contracts wearing one trench coat.

A lease-purchase combines a standard lease with a purchase and sale agreement. You move in and pay rent like any tenant, but a portion of that rent (or a separate option fee) is credited toward your eventual purchase, and you and the seller have already agreed on a future sale price and closing timeline.

It is not the same as simply renting with a vague understanding that you'll "probably buy it someday." The purchase price, the timeline, and the terms should be locked into writing from day one.

These transactions carry real risk for everyone involved, which is exactly why the forms for them aren't the kind of thing you pull off a generic template site. An attorney experienced with lease-purchase structures should draft the documentation.

The Risks You're Taking on as the Buyer

Before you commit money to an option fee or above-market rent credited toward a purchase, understand what can go wrong:

• The seller stops paying their mortgage. If the seller defaults and the home goes into foreclosure during your lease period, your equitable interest in the eventual purchase can and will be thrown into danger.
• The seller runs into financial trouble. A judgment lien against the seller can attach to the property and complicate, or derail, your ability to close later. If they don't have the funds to pay this at closing, the purchase could be in jeopardy.
• The seller lets insurance lapse. If something happens to the property during the lease term and there's no coverage in place, you may be the one who absorbs the loss.
• You fall behind on payments. If your option fee or credits are structured as non-refundable and you're evicted for missing lease payments, you can lose that money entirely with no purchase to show for it.

None of this means a lease-purchase is a bad idea. For the right buyer, in the right situation, it can be exactly the bridge you need. It means you should go in with a clear understanding about what you're exposed to, and documentation that actually protects you if things don't go according to plan.

What to Ask Before You Sign

• Is the seller current on their mortgage, and will they authorize you to confirm that in writing?
• What happens to your option fee or rent credits if you're unable to complete the purchase for reasons outside your control?
• Is there a title search being done now, or only at the eventual closing?
• Who is responsible for maintaining insurance on the property during the lease term?
• Obtain credit worthiness documents from the buyer, such as loan application information and a current credit report.

A lease-purchase can be a genuinely smart move toward ownership. It just deserves the same level of scrutiny you'd give a traditional purchase contract, because in every way that matters, it is one.

If you're considering a lease-purchase arrangement, our team at Luminary Title Group can help you understand what a title search on the property looks like now versus later, and refer you to an attorney to determine what protections are worth building into the agreement.