An arrangement which allows you to use a property on rent as a tenant with the option of purchasing the same property at a later date at an already specified price is called a Lease Purchase agreement. An option payment that is not refundable if the tenant is not able to honor the terms of the agreement is collected in advance.
This kind of an agreement is beneficial to both the buyer and seller. The former gets the opportunity to purchase a house irrespective of his credit history and need not have to take approvals from any bank. He also gets the time to save and prepare to buy the house he likes in future at a rate that is fixed and thus need not worry about any escalation in costs. He is also able to put a roof over his head in the interim and that is a great mental relief. The latter is able to dispose off his house, get some liquid cash and shed some of the inventory that is otherwise stuck for want of buyers due to the tough economic situation.
Some of the steps involved in this process are:
1. Ascertain the value of the house and determine the sale price if you are a buyer. This amount needs to fit into your budget and you have to be sure of your capability to pay at a later date. 2. Find out the monthly rent that you would be required to pay and whether this is again as per your financial capability. 3. If you are the seller, you need to be clear about the amount you will accept as the initial option payment. Knowing that this gives the right to the buyer at a later date to purchase the house and the fact that if he does not do so, you are not obliged to return the amount should be taken into consideration by you before fixing the amount. It is normally 5 – 10% of the sale price, though you can ask for more if you feel like. Typically it is directly related to the value of the house. 4. Fix the tenure you want the lease to go on. Usually it is between two to three years and can be extended. 5. Make sure the right agreement form with all the conditions and stipulations mentioned are in order and even modify if you feel it is necessary. 6. Advertise aggressively for a buyer if you are the seller and make use of the newspapers to do so as they are the most effective and inexpensive. 7. Make sure you have covered the foreclosure angle adequately.
As you would have noticed, this kind of an agreement is very simple and practical for both parties and the benefits far outweigh the initial hassles that you may need to take in getting into agreement details and legalities.