When selling a home there are a variety of options. If a seller is working with a buyer that is unable to obtain a traditional loan from a lender they can opt to lease out the property. There are two types of leasing options the seller could choose to use; lease to own or lease purchase.
What’s the difference?
Lease to own is a contract in which the buyer will be leasing or renting the home for a specific period of time and they have the option to purchase on or before the end of the contract term.
Lease purchase is a contract in which the buyer is obligated to purchase the home through monthly payments for a set number of years. For example, the buyer agrees to buy the home at $150,000 for 20 years at 6.75% interest rate.
With a lease to own the buyer can opt out after the contract is up. Whereas a lease purchase the buyer is locked in to purchase. Each option has it’s benefits and drawbacks depending on the given situation.
Lease to Own
Pros – Lease to own is great for buyers who want to try before they buy. They are able to make monthly payments as rent with a portion going towards the overall principle of the loan which will reduce the loan amount they need at the end of term.
Cons – The problem with this is that if the buyer is unable to obtain a loan at the end of the lease, the buyer can sell to someone who is able to get a loan. A buyer’s credit rating may not qualify and is not guaranteed a loan which increases the risk of being unable to purchase the home. In which case, an ordinary rental would be a cheaper alternative.
Pros – The lease purchase option is good for buyers who know they want to purchase the home but cannot get a loan. They will be able to pay the seller the same way they would a traditional lender.
Cons – If the buyer cannot afford the home at a later time or they change their minds they will be held liable for the entirety of the loan. Because the home is still owned by the seller and not a bank, the buyer will not have the option of foreclosure or bankruptcy to cover the cost of the loan.
Both options benefit sellers looking to sell fast or without the use of a realtor. If the home is free and clear of any liens, either option provides residual income. Unless the seller is looking for a lump sum at one time, both options could work well depending on the seller’s needs. However, the seller will essentially be financing the buyer and if the buyer fails to follow through with the contract the seller will be held liable for paying any pre-existing mortgages on the home.
For a buyer without sufficient funds or credit to obtain a loan, opting for a lease to own or lease purchase of a home could be a solution if a seller can be found. Lease to own is a great choice for buyers who have a less secure future and are unsure they will actually purchase the home after the term is up. Lease purchase is better for buyers who know they want to purchase the home and are prepared to follow through with a 15-30 year term.