Your Knowledgeable North Georgia Law Firm

Your Knowledgeable North Georgia Law Firm

Lease-purchase vs. lease-option: Understanding the difference

On Behalf of | Aug 7, 2023 | Real Estate Law

As people cope with the squeeze of inflation, that changes the trends in real estate markets. While bidding wars and cash sales were popular just a year or so ago, the cash crunch many would-be homebuyers currently feel is now making lease-purchase and lease-option properties popular once more.

Both options provide an alternative to traditional purchasing, allowing buyers the chance to acquire property through a lease agreement. However, these two arrangements have some distinct differences. Potential buyers should fully explore their options before making a decision.

The pros and cons of lease-purchase properties

A lease-purchase agreement is a contract between a landlord/seller and a tenant/buyer that combines a lease with a purchase agreement. In these scenarios, the tenant has a legal obligation to buy the property at the end of the lease, which is typically just a few years. Part of the monthly rent payment is usually allocated toward building equity in the property

The agreed-upon purchase price for the home is often determined at the beginning of the lease, eliminating the uncertainties of future market fluctuations. That could be good or bad, depending upon your position and whether there is a big rise or fall in the home’s market value during that time. These allow tenant/buyers the ability to build up their down payment through their monthly rent payments or they need time for credit repair (or both). Landlords/sellers like them because they can hold the tenant/buyer legally accountable if they fail to follow through, and it’s a good way to sell a property when the real estate market is lagging.

The pros and cons of lease-option properties

A lease-option, on the other hand, is an agreement that just grants a tenant the option to purchase the property at the end of the lease period, without being obligated to do so. However, these agreements typically don’t give the buyer any credit from their monthly rental payments toward a down payment on the home since they may not end up purchasing.

Also, the purchase price is usually determined by the property’s current market value at the time the option is exercised. This provides less surety for both parties when it comes to the financial issues, but can make for a fairer transaction. Tenant/buyers like this option both because it gives them time to decide if they want to commit to the property, plus time to save a down payment and improve their credit. Landlords/sellers sometimes like them because there’s less potential for conflicts; the tenant is simply a renter until they exercise their option to buy.

If you’re considering either of these as a way to buy or sell your home, remember that seeking professional assistance can help you craft a clear contract and avoid potential legal issues in the future.