What is a Lease Purchase Option?

A lease option gives would-be buyers the chance to purchase a home, apartment, or condo space after renting it for a certain amount of time. There’s usually an extra fee paid at the beginning of the lease term that will allow you to enter into the lease-purchase option. Lease-purchase options are sometimes offered when the housing market is slow, in part to entice people who may not otherwise be interested in or capable of purchasing a home. Depending on your situation in life and your home-owning aspirations, a lease-purchase option may be appropriate for you. Some of the pros and cons of the lease-purchase concept are covered below. Some agreements put part of your rental payments toward the purchase price; others might only give you first option to buy if the owner decides to sell the property. Keep in mind that the situation will vary with individual contracts and agreements, so make sure you understand the full terms of the deal before signing anything.

Pros

At a basic level, a lease to buy option is attractive because it allows you to build home equity with every rent payment you make. These payments get you closer to owning your own home or living space, and can help alleviate concerns about “throwing away” money on rent. If you’re on the verge of being able to buy your own home but aren’t quite there yet, a lease to buy option may be the thing for you.

A lease-option can be something for you to explore if you are not eligible for a home loan for some reason, perhaps a bad credit history. You may enter into the lease-purchase arrangement thinking that you can, over time, improve your credit rating enough to purchase a house at the end of the lease period. If you work hard to pay off any outstanding debts, make all payment on time, and obtain additional lines of credit, you may be able to turn the lease-purchase arrangement into a great opportunity to buy your own home.

Since lease options are often offered in slow housing markets, it may be possible for a renter to enter into a lease-purchase agreement that offers the option to buy the home for a relatively low price. If the real estate market improves, the renters can then purchase the home for less than it’s worth, and then sell for a high price.

Cons

If a portion of your monthly rental payments is set aside toward the purchase price of the property, your rent will most likely be significantly higher than it might be under a normal rental agreement that doesn’t involve an option to buy. While this is a good way to start accruing funds toward buying a home, it can also be rather expensive. Be sure that you have the financial resources to make your payments before entering into an agreement of this nature.

In addition to monthly payments, you’ll have to make a down payment of some sort to enter into the lease-option agreement. If you’re strapped for cash, this may be difficult for you to handle, and you’ll only have to pay more money later on if you’d like to buy the space. Be careful when entering into a lease-to-purchase agreement, as you can ultimately end up spending more money than you would have allowed for just rent. If you’re not able to purchase the home or apartment at the end of the lease period, you’ll be out a lot more money than you would have been otherwise.

Although a lease-purchase option may sometimes be a good option for people with a bad credit rating who couldn’t buy a home under other circumstances, the arrangement could be disastrous if you don’t end up qualifying for a loan to pay for the rest of the property at the end of the lease term. You’ll have paid far more for rent than you would have otherwise spent, and you will probably have paid additional fees to qualify for the lease-purchase option. If your credit rating is truly troubling, you should wait a while and improve it before entering into a lease to buy agreement.

As with all things, lease-purchase options have distinct pros and cons. If you are almost but not quite ready to enter into the world of property ownership, have a decent credit rating, and can predict with some certainty that you qualify for a home loan, a lease-purchase option may be the right thing for you.