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What is a Lease Purchase Contract?

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  • Written By: Susan Grindstaff
  • Edited By: Heather Bailey
  • Last Modified Date: 26 September 2017
  • Copyright Protected:
    2003-2017
    Conjecture Corporation
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A lease purchase contract is a type of legal agreement that involves leasing a property for a specified period of time, with an agreement to purchase once the lease has expired. The terms of the lease purchase contract are typically negotiated between the buyer and seller prior to signing, and there are few laws that govern the actual wording or specifics. Most jurisdictions do require that the agreement should have a specific date that outlines the beginning and end of the contract. In addition, all financial terms should also be clearly defined, including purchase price, lease payments, and interest rates.

In some cases, a lease purchase contract will state that a specified amount of each lease payment will be applied to the purchase price of the property. From a seller’s perspective, ideally, that amount should be as little as possible. The seller will generally take into account what he would normally be receiving as a regular rental payment, and in most cases, he would not want that to be reduced. For this reason, a lease purchase contract that allows for a portion of payment to apply to the purchase price may have monthly lease payments that are above the average market price for a comparable rental.

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Most of the time, a lease purchase contract will favor the seller. This is generally because buyers who enter into these types of agreements typically do so because they may not be able to obtain traditional financing. This usually puts them in a poor position for negotiating terms. Often, these buyers will end up with a purchase price and lease payments above market value. In many cases, sellers insist on higher interest rates than the buyer would normally get from most banks or mortgage companies.

Generally, a lease purchase agreement pertains to real estate, but other types of properties can be transferred using this method. Many furniture and appliance dealers typically offer lease purchase contracts that are commonly referred to as “rent to own.” Such an agreement would usually apply a percentage of each lease payment to the purchase price of the item, and will extend the agreement until the full purchase price has been paid. In addition, these contracts typically allow for early payoff without a prepayment penalty.

Regardless of whether the lease purchase contract is for real estate or furnishings, they are usually considered legally binding. Both the buyer and seller should probably seek the advice of an attorney before entering into such an agreement. Laws that govern the terms and wording of a lease purchase contract may differ, depending on where the parties reside.

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