Lease-option: A unilateral agreement. You have the right to buy, but aren't required to. The seller, on the other hand, is required to sell if you choose to buy. Typically, you pay an up-front option fee (the amount varies, but often is 1%-3% of an agreed-upon purchase price). You lease the property for a period of time (2-5 years, typically; less is very risky), often with a percentage of what you pay in rent credited toward the purchase price. During or at the termination of the lease, you have the right to buy the property at the agreed-upon price.
Lease-purchase: Similar to a lease-option, but a bilateral agreement. You have agreed to buy; the seller has agreed to sell. The remainder of the description, above, is the same--an up-gront option fee, a predetermined purchase price, a specified period for the option, a portion of your payment credited toward the purchase price.
Your rights under either scenario can vary, depending on what you and the seller have agreed to. Typically, the option fee is nonrefundable. Any rent credits--the portion of your rent credited toward the purchase price--are nonrefundable. So if you choose not to buy (under a lease-option) or can't buy (under a lease-purchase), you lose both your option fee and rent credits.
Your rights as a tenant (under the lease portion of a lease-purchase or lease-option) are similar to those of any tenant. And they'll be governed by your local and state laws. However, often a lease-purchase or lease-option requires the tenant to cover a larger share of any repairs or maintenance. You can be evicted if you fail to pay your rent.
The option or purchase agreement can contain some important rights . . . if you write them in. For example, as Tim notes, it can be a real problem if the property doesn't appraise for the agreed-upon purchase price. But you or your lawyer can build some protections in. For instance, if the property doesn't appraise for the agreed-upon purchase price, perhaps the option can be extended for another year. Or the seller agrees to sell the property for the appraisal amount. Or the seller agrees to refund to you your option fee and rent credits. Which solutions is right for you and the seller depends on what you and the seller need.
Another right you want to include: Making sure that the seller is paying his/her mortgage. That can be accomplished in a number of ways. Maybe there's a third party that you send your payment to. Maybe you pay the mortgage directly. Maybe you obtain a document from the seller allowing you to contact his bank to make sure the mortgage payments are being made.
A good real estate lawyer familiar with lease-options and lease-purchases can assist you.
Hope that helps.
Happy funding, Rudi
Lease to own is the same as rent to own. You pay rent according to your lease and have an option to purchase the property sometime in the future. Terms and consditions vary so review your lease to own contract carefully, and possibly have a real estate attoreny review the agreement with you prior to signing. Sometimes a portion of the rent paid is applied to the purchase price of the property.
All the best,
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