A lease purchase real estate agreement, sometimes also called a rent-to-own, is basically an option to buy real estate at a certain time and at a certain price.
One of the most important terms to have in a lease purchase agreement to buy real estate is that an escrow or servicing company collects the monthly payment.
After collecting the payment the escrow company accrues the portion of the payment that goes toward the purchase price into an escrow account.
Lastly, they remit the balance to the seller.
Basics of a Lease Purchase Real Estate Agreement
The seller and tenant/buyer should:
1) Agree to a future purchase price at a certain date.
2) Agree to the lease amount of the monthly payment.
3) Agree to the total monthly payment which includes the rent and the extra amount that goes toward the purchase price.
This lease purchase real estate agreement should be written and treated like any other purchase contract.
The seller and tenant/buyer should have a third-party such as an escrow company or attorney collect the total monthly payment from the tenant/buyer to the seller, accrue the funds that go toward the purchase price, and remit the balance to the seller.
Issues With A Lease Purchase Agreement
Many times people enter into a verbal lease purchase real estate agreement. They don’t use an escrow company or third party to receive, account for, and disburse the monthly payment. Instead, they do everything themselves.
Doing this puts both the seller and buyer/tenant at risk. Normally people do this to try and save a little bit of money.
The two common issues that arise with a lease purchase agreement for real estate are:
1) Who pays the monthly servicing fee.
2) Determining the future price of the property.
In most cases, splitting the escrow fee between seller and tenant/buyer is the accepted course of action.
The agreed-to sales price of the property can be confirmed with an appraisal when the lease purchase real estate agreement is exercised.