Lease Purchase Agreement - Profits and Perils

The practice of lease as a method of possessing the custody of a property without securing its ownership was prevalent in different parts of the world since several centuries. During the post industrialization era, lease purchase agreements were used to procure properties such as factory buildings and machineries. However, in recent times lease as a mode of purchase became quite popular in the real estate industry. The monitory benefits and considerations of buying a house or estate on lease attracted both buyers as well as sellers to this system.

In case of a lease purchase agreement, benefits are mutual for the buyer as well as the seller. However, the extent of benefit is dependent on several factors. Changing prices in a real estate market is one of the main influencing factors. And the other aspect deals with cancellation or closure of a lease purchase agreement. To get a better idea, we should analyze both the above aspects in terms of a lease purchase transaction. Basically, a lease purchase agreement results in formation of two contracts. The first one is a lease contract and the second one is a purchase contract.

Under the lease contract, the seller agrees to let the property to the buyer for a fixed sum of monthly lease. And under the purchase contract, the seller agrees to transfer the title of ownership to the buyer on a fixed date in future or on completion of the lease purchase agreement. The lease contract is completed the moment it is signed by the parties; however, the purchase contract doesn't materialize until the title of ownership is transferred in favor of the buyer. The entire term of lease may be 4 to 5 years but the term varies in case of each agreement. And throughout this term, the buyer has to regularly pay the lease money. The concept is far similar to installment purchase of equipments or home appliances.

The buyer can start using the property by just paying a deposit of approximately 10 to 12 percent of the entire sale price. The rest of the price is divided into lease payments over the entire period of lease. This lease payment is an aggregate of the real value plus its monthly interest. This interest or the extra amount payable by the buyer is considered as a compensation for the time allowance enjoyed by the buyer. Thus, by the end of the purchase contract the seller secures a hefty sum which is much more than the market value of the property at the time of the lease. However, if the real estate prices rise, then the total sum retrieved might be less than the market value at the time of the closure.

Every lease purchase agreement does not materialize into a real purchase. Many a times, the buyer terminates the entire contract before its maturity and surrenders the occupancy. However, the buyer cannot claim back the deposit money or the lease payments made. But if the buyer completes the contract, he can secure a house whose value would be much higher than the market value prevalent at the time of the agreement. In order to exploit this phenomenon many real estate dealers practice lease purchase as a part of their business.

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