I’m often asked what the difference is in realestate investing when it comes to a lease option versus a lease purchase. While the difference may seem subtle, it’s actually significant when it comes to realestate investing. A lease option is exactly what it says, an option to buy but not a commitment. On the other hand, a lease purchase is a full commitment to complete the realestate purchase.
I’ve covered the lease option many times in this column so today I’ll focus on the lease purchase. There are similarities between the two but the firm commitment to make the purchase is the major difference.
- What is the contractual difference between the two?
- This is the important difference in these realestate transactions. The lease option involves two contracts. A separate one for the lease and another for the option to purchase but not the obligation to purchase. The lease purchase is often contained in a single purchase and sales agreement. There is a pre-set date that the realestate transaction must close but it’s contingent on one or more terms that must be met before the closing can occur. It could be that the buyer must finish raising the down payment or the seller might need to make repairs. In the mean-time, the buyer leases the realestate. The terms to be met are spelled out in an addendum to the realestate purchase and sales agreement.
- Why would a buyer or seller want a lease purchase arrangement?
- There can be many reasons. A typical reason for a seller is he can obtain a higher selling price but wants to be sure he has an obligated buyer that he wouldn’t have with a lease option. The seller might be positive this is the realestate he wants to own but a certain term needs to be completed before the sale can take place. Also, the buyer might be able to have part of the rent applied towards the down payment.
Q3. What should the seller look for in the buyer with a lease purchase realestate transaction?
A3. Typically, the seller wants a buyer that is reasonably strong financially. Often, a buyer that is waiting for another realestate transaction to close that will free up the funds for the down payment.
Q4. Why would a buyer want to enter into a lease purchase agreement for realestate?
- There can be many reasons such as the need to raise the down payment or have part of the rent apply to the down payment. Or it could be more mundane such as needing to establish two years of state residency or a work history that are often required to qualify for a mortgage.
- What should be included in the lease purchase contract.
- This can be tricky and it’s strongly advised that you seek out the services of a qualified realestate attorney. One of the most important terms to be included are the exact conditions that must be met to close the deal. The date the realestate transaction must close by is another important legal point. In addition, who pays for what? For instance, who is responsible to pay the property taxes and insurance along with which party if responsible for any needed repairs. Finally, what are the remedies if either party defaults on the agreement? For the seller, the remedies are typically the same as for any default on a purchase agreement. The seller will keep the earnest money and any above market rents. For the buyer, the remedy isn’t as clear and must be carefully spelled out in the agreement.
If you want to work directly with me on the lease purchase realestate investing model or any of the other investing models that have proven highly profitable, please join me at www.wendypatton.com/what-is-wendy-pattons-inner-circle.
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Several times each week, I make the most current real estate investing information available to readers. This time, it’s about the lease purchase real estate investing model but the information I provide changes constantly to stay current with the market. Be sure to check back at: www.wendypatton.com. Also, get started learning how to do NO CASH lease options on real estate by picking up a copy of my bestseller book: Investing in Real Estate with Lease Options and Subject-to Deals.
By Wendy Patton
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