Lease-Purchases and Rent Credit Explained

Rent credit is a portion of monthly rent set aside for a down payment on a property if you are in a lease-purchase agreement. Not all lease-purchase agreements provide rent credit. The terms of your agreement will determine if you receive credit, how much credit you receive and how the other expenses of your agreement are allocated when your contract expires. 

Lease Purchase Option Money

Option money is required for a lease-purchase agreement to be legal. When you enter into the contract, the seller agrees to hold the listing of the property exclusively for you over the life of your lease. In exchange, you agree to the terms of the lease and purchase. Some lease-purchase agreements have options when they expire. Others require the purchase of the property in exact terms at the beginning of the lease-purchase contract. In both scenarios, option money is required. This is not a down payment on the property. It is simply provided in exchange for exclusivity from the seller. The option money may be as low as a single dollar or as much as several thousand dollars. 

Lease-Purchase Rental Money

During the time your contract is active, you will lease the property by making a monthly payment. You and the seller agree to this payment at the beginning of your contract. As with any other rental agreement, this payment can stay consistent over time or change due to market considerations. If you are the buyer, it is recommended that you set a consistent price that will not fluctuate over the life of the lease. If you are a seller, it is not common to build in increases to this sum. However, if you know your mortgage will go up in the time the buyer leases the property, you may try to add a clause that would provide for the lease payment to also go up.

Lease-Purchase Rent Credit

In addition to the standard rental fee, a renter can provide several hundred dollars extra per month toward the eventual purchase of the property. This is the only official "credit" the buyer actually receives for the years spent leasing the property. Not all lease-purchase agreements include a rent credit. This credit is paid to the seller, so the seller must negotiate the credit and assure it is ultimately applied to the down payment at the time the contract expires. 

Protecting against Seller Default

As a buyer, you have a lot at stake in a lease purchase. First, your option money will not be returned to you if the contract is not executed due to problems on your end. The same may be true of the rent credit. However, if the seller defaults, you may be entitled to a full refund of both the option money and the rent credit. The key to recovering funds is anticipating this problem. Include terms in the contract that provide you with a full refund accounting for the monthly rental credit in the case the seller cannot execute the contract as planned.