Rent-to-own and lease purchase are alternatives for homebuyers who may have difficulty qualifying for a mortgage and must clean up their credit to gain loan approval. Some people use the terms interchangeably. The key difference, however, is that rent-to-own offers an option to buy, while a lease purchase may obligate the tenant to buy.
Keep Your Options Open
A rent-to-own agreement gives a tenant more flexibility to turn his lease into a home sale contract than a lease-purchase contract. Rent-to-own gives him more time to save for a down payment or improve his credit. When the tenant signs the lease, he gains the exclusive right to buy the property at a prearranged price before the lease expires if he so chooses. Normally, he makes a monthly payment that includes rent and an additional amount, the rent credit, that goes toward the down payment. The landlord-owner retains the extra rent if the option to buy is not exercised.
Buy Yourself Some Time
In a lease purchase, the tenant agrees to buy a property at a preset price after leasing it for a period of time. The purchase price may be based on the future value of the home instead of the current market value. The tenant also takes on property repair and maintenance costs during the initial lease term. He pays an additional amount upfront or a monthly that may or may not be applied to the eventual purchase price. The tenant-buyer forfeits his payment if he doesn't complete the property sale at the end of the specified period.
Define the Details
Whether you sell or buy a house by a lease-purchase or rent-to-own agreement, you should define the lease term, purchase price, down payment and rent credit before signing it. Typically, the term runs anywhere from 12 to 36 months, but it can be any period of time agreed upon. Some landlords may refund some of your rent credit or make other concessions; all concessions should be negotiated and written into the agreement beforehand.
Seek Legal Advice
When you sign a lease-purchase or a rent-to-own agreement, both you and the landlord-owner are entering into a legal and binding contract. Have an attorney review the agreement before you and the landlord bind yourselves to the contract's terms and conditions.
Chris Brantley began writing professionally for a financial analysis firm in 1997. From 2000 to 2004, he worked as a financial advisor, specializing in retirement planning and earned his Series 7, Series 66 and insurance licenses. Brantley started his full-time writing career in 2012 and has written for a variety of financial websites, including insurance, real estate, loan and investment sites. He holds a Bachelor of Arts in English from the University of Georgia.