If you`re looking to buy a property but don`t have enough funds to do so, a lease purchase option agreement (LPOA) may be your solution. This agreement is a contract between a buyer and seller in which the buyer leases the property for a certain period with the option to purchase it at the end of the lease term.
Here are some key things you need to know about LPOAs:
1. How it works
In a lease purchase option agreement, the buyer agrees to lease the property for a specific period of time, often ranging from one to three years. During this time, the buyer pays a monthly rental fee, which is higher than the market rent, and a portion of it is credited towards the purchase price. The buyer must also pay a non-refundable option fee, which gives them the right to purchase the property at the end of the lease term.
2. Advantages for the buyer
LPOAs are beneficial for buyers who may not have enough funds for a down payment or those who may not qualify for a mortgage due to poor credit scores. With an LPOA, buyers have time to improve their credit scores, save for a down payment, and build equity in the property.
3. Advantages for the seller
Sellers also benefit from LPOAs. They can generate income from the rental payments, and they have the assurance that the property will be sold at the end of the lease term. If the buyer fails to complete the purchase, the seller keeps the option fee and rental payments and can lease the property again or sell it to someone else.
4. Risks for the buyer
One of the main risks for the buyer is if they fail to purchase the property at the end of the lease term, they lose the option fee and the equity they have built in the property. Additionally, if they default on their rental payments, they risk losing the option to purchase the property altogether.
5. Risks for the seller
For sellers, the main risk is if the buyer defaults on their rental payments, they may face a lengthy and costly eviction process to regain possession of the property.
In conclusion, an LPOA can be a good option for buyers who want to buy a property but don`t have enough funds for a down payment or have poor credit scores. However, buyers and sellers should carefully consider the advantages and risks before entering into an LPOA. It`s always recommended to consult with a real estate attorney before signing any contract.