Here's how it works:

In its most simple form, a lease-purchase agreement is nothing more than a written contract to purchase real estate allowing for performance over an extended period of time, typically not exceeding thirty six months. It is usually coupled with an agreement to allow the purchaser to occupy the house and pay rent on it while he is completing the purchase.

In contrast, a lease-option agreement is primarily an agreement to rent real estate. That agreement contains a provision granting the renter the option of purchasing the real estate at some point in the future if he so chooses.

Here's why it's working today:

Traditional lenders have tightened underwriting guidelines and raised minimum credit standards, and there are lots of first time buyers who have been pushed out of today's buying market.

They may have been sitting on the fence when the credit rules changed, or they may not have been able to pull the purchase trigger in the past. Whatever the case, they hope one day to own a home. A lease containing an option to purchase may give the buyer enough time to get qualified and make the purchase they want.

Here's why it has become so popular:

In today's market, there are too many sellers and not enough buyers, and some of the sellers are willing to compromise on their goal of getting a quick sale in order to get some revenue coming in to help cover the mortgage payment.

A lease-purchase arrangement can meet the needs of both parties, allowing a renter to get a "ownership experience" while still renting, and at the same time giving the seller a monthly income to cover expenses while the buyer works to improve his credit.

Typically, a lease-purchase agreement includes these features:

* A complete rental agreement outlines the relationship between the resident and the owner. This can be the same rental agreement that you might use if you were simply renting for a specific term, then intending to vacate.

* If this is a lease-purchase, there will be a simultaneous contract for the purchase of the property, specifying the price, the "on or before" closing date, and the other terms and conditions of the sale. In this contract, a non-refundable "down payment" is often made from buyer to seller. This down payment is usually applied toward the purchase price.

* If, instead, this is a lease-option, then there may or may not be any
"down payment," and it may or may not be refundable, depending on the agreement. As an alternative, the lease-option agreement may specify a more traditional (and refundable) security deposit.

* A common feature of almost all these agreements is a "rent to own"
provision. This clause specifies that some portion of each rental payment shall accrue toward a reduction in the purchase price of the property, even if that price has yet to be determined.

A small provision might be a monthly credit of $100, to be accumulated by the owner for use as a credit against the purchase price of the property. A more generous offer might be a credit of $400 per month, allowing the renter to build a sizeable down payment of almost $5,000 for each year of rental.

I have even heard of sellers so highly motivated to cause a sale of their home that they offered a credit of one hundred percent of all rents paid as a credit against the purchase price. Obviously a seller in this category would need sufficient equity in the property to cover such a generous offset. But the arrangement would solve the immediate problem of a double mortgage payment.

In addition, it would have the further effect of almost guaranteeing an
eventual sale. What smart buyer would walk away from a $24,000 credit after two years of renting?

* Another typical feature of these types of contracts is a provision asking the renter/purchaser to inspect the house as they move in and agree to accept it in "as is" condition now. This is to prevent the renter from damaging the house, then asking the seller to make repairs prior to the sale.

* Additionally, the agreement typically also makes the renter responsible for all repairs during the life of the lease and until the purchase occurs. The idea here is that since the buyer is going to buy the house, he can take on the responsibility for upkeep now.

However, this provision may not be enforceable under Georgia law, which prevents the owner of residential rentals from transferring the responsibility to repair. I'd better leave that one to the attorneys to sort out.

* Finally, almost all these lease-purchase agreements are limited to thirty six months of less in duration. That's because today's conventional loan documents prevent lease agreements in excess of that time period. Lenders consider that any lease in excess of three years is likely a thinly-disguised sale attempting to bypass federal "due-on-sale" provisions.


Whether you are a buyer or a seller, it's wise to have your attorney review and explain all the details of the written agreement. Depending on how it's written, the contract may or may not deliver exactly what you seek.

NEXT WEEK: Frequently asked questions on lease-purchase agreements.