How to Read a Lease Purchase Contract

A lease purchase contract is different from a lease option contract, and this small difference can be a tremendous problem for unassuming borrowers. When you enter a lease-to-own option, or lease option, you have the choice of backing out of a sale if you do not decide to pursue ownership of the property after your lease expires. However, if you are in a lease purchase contract, you do not have this option. Look through the fine print to determine exactly what you are agreeing to.

Non-Refundable Option Money

The first thing to review is the up-front cost you will owe in order to enter the lease-to-own contract with the seller. You will have to provide some good faith money, known as option money, in order to legally close the deal. This amount can be very small; in fact, even one dollar will render the contract legal. However, the seller may want more up front. This cost is not applied to the sale of the home, and it is non-refundable. As a result, you should aim for a low option cost. It is simply additional added expense on your home.

Monthly Rental and Expenses

You will need to set the monthly rental requirements from the beginning. The rent consists of two parts: first, the cost to lease the property from the seller and, second, money paid toward the down payment of the purchase of the property. Make sure you know how much is being contributed to each. If you are not contributing enough to the down payment, you may have to come up with a large bulk sum at the time you purchase the home. Ask the seller who will be paying expenses such as property taxes, home insurance and city utilities while you live in the home. These can be additional costs to shoulder even though you do not technically own the home.

Home Purchase Price

There are two ways to set the price for the home. You can choose a price today, which most buyers prefer. You can also agree to determine a fair market price in the future, which most sellers prefer. Locking in the price today is clearly the better way to ensure you will be able to afford the home when the time comes to purchase the property. Property is much more likely to go up in value than down in value, so locking in the price today typically favors the buyer.

End of Contract Options

With a lease purchase contract, there is no option at the end of the contract. You will be legally obligated to move forward with the sale of the home. If you exit at this point, you will be considered in default of the home contract, which carries a host of penalties in the immediate and distant future. This is essential to note about your contract. If you want to build in an option, you have to do that on the front end. Once you sign a purchase contract instead of an option contract, you waive the right to back out of the deal.