5 Provisions of a Lease-Purchase Program

A lease purchase program allows you to move into a home you cannot yet afford to purchase. A lease purchase is different from a lease option; with a purchase program, you are signing a contract today that guarantees you will purchase the home in the future. It is a binding sales contract with several key provisions.

#1 Option Money

Option money is like "good faith" money placed at the beginning of the purchase contract. This cash does not apply to your down payment or rent. It is simply cash you give the seller in exchange for the exclusive right to live in the home today and purchase the home in the future. This option money can be as little as a single dollar, but it is required by law in order for a lease purchase to be binding.

#2 Maturity

Maturity is the length of time you have to live in the home without purchasing the home. This time period should be long enough for you to save the down payment required to eventually purchase the property. However, the maturity of the contract should be as short as possible so you can begin to build equity in the home. As long as you are renting, even if you are contributing toward a down payment, you are not earning equity in the property.

#3 Rental Agreement

In a lease purchase, there are two portions to each rent check. The first is the cost to simply rent the property. The second is the additional money you are paying toward the down payment of the home. As a result, renting a lease purchase home will be more expensive than renting another property type. However, the additional cost is like "forced savings" toward the eventual purchase, so it is not wasted like other expensive rental agreements may be.

#4 Expenses during Rental

You will have to determine who will be paying costs like home owner's insurance and taxes during a rental period. As the legal owner of the property, the seller needs to assure the property is legally managed. If home owner's insurance is not sufficient to cover damages, the seller is taking on a large risk renting out the property. If the buyer fails to meet tax payments, the lien will go against the property, not the buyer, and can be a problem for the seller in the future. As a result, all of these items must be clearly covered in the contract to determine who will assume which responsibility.

#5 Purchase Agreement

It is common to determine a sales price for the home before signing a lease purchase agreement. This would require both the buyer and seller to agree on a price in advance. This favors the buyer. As home prices tend to go up, the seller would prefer to leave the price open-ended because he or she would have the advantage down the line. You, as a buyer, should aim to lock in a price today for a sale in the future. Remember: in a lease purchase program, you cannot walk away from the sale.