18 Oct What Does Lease Purchase Mean?
If you’re looking to start investing in real estate but are unsure where to start because you don’t have tons of assets or funds available, a lease purchase may be the route you want to go. But what does lease purchase mean?
Our company controls 55-60, and sometimes even more properties, many of which are bought using a lease purchase. If you’re unfamiliar with the term lease purchase, don’t worry. We are going to guide you through what a lease purchase is throughout this blog.
But the main thing to know about lease purchasing is that you can leverage them to build your real estate portfolio without having liquidity.
What is a Lease Purchase?
In short, a lease purchase is a contract in which a portion of the lease payment or rent is applied to the property’s purchase price.
Many places, including our company, use the terms lease purchase and rent-to-own interchangeably. Using the term “rent-to-own” may make it more clear to sellers what it is you’re talking about.
The basic premise of a lease purchase is that the person who wants to buy the property puts money down–earnest money–which is a good faith payment that helps to guarantee the potential purchaser will buy the property at the end of their rental contract.
So, the contract written to buy the property includes a certain amount of time, say 24 months, where the purchaser is renting the property. Typically, part of the rental payment will go towards the purchase price of the home. Plus, the earnest money is often used as the down payment for the purchase of the home.
With a lease purchase agreement, you can often avoid costs associated with purchasing a home outright or getting a mortgage. Additionally, lease purchases are particularly ideal for those with less than perfect credit or people who don’t have the funds for 20% down on a home or money for investing.
How to Explain it to a Seller
Because lease purchases aren’t always common knowledge, sometimes a seller may hesitate to open a deal based on a rent-to-own agreement. But don’t worry. There are ways to combat this.
First, when approaching a seller about buying their home on a lease purchase, be sure to always call the seller. Not only does calling the seller work to create a relationship, but it also means you can explain what a lease purchase is more clearly.
Information and tone can often be misinterpreted when communicating with sellers via email. This can create problems in a sale that could otherwise be smooth. You don’t want to miss the opportunity for a lease purchase simply because the agreement was misunderstood.
Second, you can hit the seller with cold, hard facts.
Did you know that roughly 82% of potential buyers can’t get approved for a loan? Most buyers don’t. Eighty-two percent is an alarmingly large percentage of your potential buyers who won’t qualify for a home.
Even when a potential buyer is pre-qualified, it doesn’t mean they will ultimately get the funds. It’s important to inform the seller of these incredibly high odds that a buyer won’t qualify for a loan, even if they have a pre-qualification letter.
With such a large pool of people being eliminated from buying a home simply because they can’t get approved for a house, a home can sit on the market for a long time. However, when a seller is open to lease purchases, suddenly, the pool of buyers expands greatly. And, we all know that the larger the pool of buyers, the faster the home will sell. Plus, the higher the demand for the property, the higher the property will sell.
When you present the idea of a lease purchase in this way, the seller sees that a rent-to-own option may be the best option for them. It can bring them top dollar for their home and get their home sold faster. A win-win for everyone.
So, What does Lease Purchase Mean and How Would that Affect the Buying Process?
- A lease purchase is a contract in which a portion of the lease payment or rent is applied to the property’s purchase price.
- Lease purchases allow you to build your real estate portfolio without having liquidity
- They allow you to often avoid costs associated with purchasing a home outright or getting a mortgage.
- Make sure as you are buying to call the seller to explain lease purchase vs. communicating via email.
If you're still asking “what does lease purchase mean?”, be sure to check out this video from Smart Real Estate Coach.
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