What does "Lease-Purchase" mean in real estate?
A lease-purchase agreement is a legally binding contract that combines a rental lease with a mandatory future purchase obligation. Under this arrangement a tenant (buyer) leases a property for a set term and is contractually required to buy the property at a predetermined price by the end of that lease. The deal typically includes an upfront non-refundable option fee and may credit part of each month’s rent toward the eventual purchase price (often called rent credits).
Key elements
- Predetermined purchase price: The sale price is set at the start of the lease so both parties know the closing target.
- Lease duration: Often 1–3 years, but terms can vary.
- Monthly rent payments: Regular rent is paid; a portion may be applied to the down payment or purchase price.
- Option fee (non‑refundable): Paid upfront to secure the buyer’s right and obligation to purchase.
- Buyer’s obligation: The tenant is legally required to complete the purchase by the lease-end; failure to close usually means forfeiting the option fee and any rent credits.
- Maintenance, taxes and fees: Responsibilities for upkeep, taxes, insurance and repairs are specified in the contract and can be allocated to buyer or seller.
How it’s used in the real world
- Buyers with credit or savings gaps: People who don’t yet qualify for a conventional mortgage can lock in a home, build credit, and accumulate rent credits toward a down payment.
- Sellers securing a future sale: Sellers earn rental income, reduce vacancy risk, and often get better property care from tenants planning to buy.
- Community development programs: Nonprofits and local governments sometimes use lease-purchase programs (with counseling and support) to transition low-income families into homeownership—examples include county-run programs with pre-lease counseling and lease-extension options.
- Commercial real estate: Lease-purchase structures are also used for business properties so tenants can occupy and later assume ownership under agreed terms.
Example scenario
Imagine a 24‑month lease-purchase on a $200,000 home. The tenant pays a $5,000 option fee upfront and $1,200/month rent, with $300/month credited toward the purchase. After two years the tenant must obtain financing and complete the purchase; if they can’t, they typically lose the $5,000 and the accumulated $7,200 in rent credits.
Benefits at a glance
| For the buyer | For the seller |
|---|
| Move in immediately with a clear path to ownership | Guaranteed future sale and steady rental income |
| Accumulate equity via rent credits and option fee | Lower vacancy and better property care from motivated tenants |
| Time to improve credit and save for closing | Clarity on sale timing and financial planning |
Risks and considerations
- Because the purchase is mandatory, buyers face the risk of losing upfront fees and credits if they can’t close.
- Predetermined prices can be a risk if market values change significantly up or down.
- Contracts must clearly spell out maintenance duties, tax responsibilities and default remedies—legal review is strongly recommended.
In short, a lease-purchase blends renting with an obligatory purchase commitment—offering a route to homeownership for some buyers and a secured sale and income stream for sellers—but it requires careful contract terms and realistic planning for financing at lease-end.
