Property ownership has become the pinnacle of real estate investment. As a result, business owners are seeking ways to purchase properties. One of the solutions is a lease purchase option.
Lease purchase options allow business owners an opportunity to buy the property at some point in the future. This combines the security of a long-term lease with the ability to build equity through property ownership if the business warrants this type of infrastructure investment.
Lease purchase options became more widely used during the 1970s and 1980s. That was the time when high interest rates and the impending savings and loan crisis of the 1980’s caused real estate activity to plummet. These factors combined to create real estate market conditions similar to those we are seeing now in the wake of the mortgage crisis and the financial meltdown.
In order to attract buyers, sellers fine-tuned inducements such as leases. The sellers allowed leases to contain built-in options that allowed the tenant the right to purchase the property at a later date.
Lease purchase options have continued to evolve since the 1970s, but the basic elements have essentially remained the same. A lease purchase option gives a business owner the right to buy the property within a specified time frame for a pre-determined price.
Lease purchase options were designed as an incentive to buyers. They allow buyers to find and secure a property location and move forward with a purchase when they are ready to do so. The option allows a buyer to lease the premises for a set period of time, with the option to purchase. The option allows a purchase to be made at any point during the option period. This varies based on how the option is worded. The buyer pays for the privilege of having such an option. The payment is similar to a deposit payment made with a traditional purchase agreement, although it is typically a nonrefundable deposit.
The buyer and seller can set a purchase price at the acceptance of the option or assign a value to the sale at the completion date of the option. Most buyers want to lock in the purchase price at the beginning of the option period.
Sellers need to be aware that during the option period they are basically giving up the right to sell the property to another party. Lease purchase options typically cover a 12-to-36-month period, which means sellers run the risk of forgoing any natural price appreciation that can occur during the option period.
With fragile economic stability and unstable real estate markets across the country, lease purchase options offer sellers another way to attract reluctant buyers. Investors can seek profitable lease returns while waiting for the sale to finalize during the lease period.
This offers a win-win scenario for both buyers and sellers.