Lease purchase is a renting agreement which includes the option to buy the lease property later on. Such an agreement is useful if you want a specific house but your finances are not in order. Signing a lease purchase agreement allows you to rent that specific property and live in it while you save enough money or arrange finances to purchase it. In effect, you get to enjoy and control the property of your liking until you are able to formally buy it.
Carefully consider the implications
Before you enter into a lease purchase agreement, you need to carefully consider the implications of one. It is not as simple as renting a property, because the option to buy the property later on comes at a price. The fee for this option is usually between 3 to 5% of the purchase price, and while you have to deposit it in the start, it is not refundable in case you fail to arrange the finances for purchase later on. You should be certain that you wish to buy the particular house, because if you change your mind later on, you will only end up wasting money.
Find a suitable house
You should find a house which you can afford. While you won’t be required to furnish the complete purchase price in the start, you should be able to arrange it before the term of your lease ends. If you find a house for sale, you can ask the seller to consider a lease purchase agreement.
Discuss the arrangement with the homeowner
Lease purchase agreements are not very common and most homeowners are not aware of how they work. If the seller or a property is looking for a quick sale, it is unlikely that he/she will settle for a lease purchase agreement. If you are unable to convince a homeowner, hiring the services of a realtor can be helpful, since he/she may be able to find sellers who are willing to consider your proposition.
Settle on the terms for the agreement
Having found a suitable home and a seller, you will have to negotiate the terms of the lease purchase agreement. The major conditions include:
Selling price: This is the purchase price of the home you will be required to pay if you exercise your option to buy.
Option term: This denotes the time frame for you to exercise your option to buy. Typically this ranges from 3 to 5 years.
Option fee: The option fee is typically 3 to 5% of the selling price and is not refundable if you don’t exercise the option to buy.
Monthly rent: This is the amount of rent you will be paying every month. You can also mutually decide to credit some portion of this payment towards the selling price of the property.
Right to assign: If the seller agrees, you can include a right to assign in the agreement, which allows you to transfer your ‘option to buy’ to another party, in case you are unable to exercise it.
Arrange the finances and purchase the property
Once the agreement is signed and operational, you will be expected to make monthly rent payments. The option term is the time period you have to arrange the finances to purchase the property. You can apply for a bank loan during this period and once you have the money, exercise your option to buy and become the owner of the property.