What Does It Mean To Lease A House?
February 22, 2024 9-minute read
Author: Ashley Kilroy
Buying a home typically involves hefty upfront costs, including a down payment and loan origination fees. Spreading those costs over a year and locking in a purchase price ahead of time can lessen the burden of these expenses. Leasing a house allows you to do just that.
Because it’s a less popular option, what leasing a house means can be unclear. Ultimately, a lease is a legal agreement between a landlord and a tenant that allows the tenant to initially rent the home and possibly buy it when the contract ends.
What Is A Lease Agreement?
A lease purchase agreement, also known as a rent-to-own or lease-to-own agreement, is a contractual arrangement between a landlord (or property owner) and a tenant that allows the tenant to purchase the property after a specified period, typically at a predetermined price. Signing the document legally binds both parties (landlord and tenant) to the agreement’s terms. Depending on the terms, the agreement can give the tenant the option to buy the home, but it can also require the tenant to buy it.
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What Does Leasing A House Mean?
A house available for lease indicates a formal contract between the property owner (or landlord) and the tenant, whose terms allow the tenant to rent the property in exchange for regular payments over an agreed-upon time frame.
Typically, leasing a house means the tenant agrees to live in the home for 1 – 3 years. In addition, the tenant pays an upfront option fee. This non-refundable payment secures the tenant's right to purchase the property at the specified time.
The contract also defines the purchase price, locking in what the tenant will pay in the future. As a result, market fluctuations don't affect the price, which can be advantageous for either party, depending on the economy. The tenant pays the landlord monthly rent, but a portion of the rent can go toward the purchase price. If the tenant doesn't want to buy the house when the contract expires, they'll forfeit the option fee.
This type of agreement can be beneficial for both parties: the tenant has the opportunity to become a homeowner without having to secure a mortgage immediately, and the landlord may secure a tenant with a vested interest in maintaining the property.
What Are The Pros And Cons Of Leasing A House?
Leasing a house is a complex legal and financial move. Therefore, it’s best to understand the implications before committing to an agreement.
Leasing A House Pros
- No upfront down payment: When you lease a house, you don't need to make a down payment. Instead, you'll pay an option fee that acts as a security deposit for the home. Plus, part of your rent counts towards buying the house, allowing you to build up a lump sum over time instead of paying thousands at once.
- No closing costs: Unlike when buying a home, where you may incur expenses for various closing costs (such as fees for appraisals, inspections, title insurance, and legal fees), leasing a house does not involve these additional costs until you purchase it.
- Landlord handles repairs and maintenance: One convenience of leasing is that the landlord is typically responsible for handling repairs and maintenance on the property. This feature saves the tenant the time, money and hassle of arranging and paying for repairs.
- No property tax or structural insurance: As a tenant, you are not responsible for paying property taxes or homeowners insurance. These expenses are typically the responsibility of the property owner. However, it's advisable for tenants to purchase renter's insurance. Fortunately, this coverage is usually cheaper than homeowners insurance.
- Easier moving out process: When a lease term ends, the tenant can buy the property if they wish. If not, they don't have the burden of selling the property before they can move out. Instead, they notify the landlord, complete any necessary move-out procedures and find a new place to live.
Leasing A House Cons
- Rising rent amount at the end of each lease: One risk of leasing a home is the potential for the landlord to increase the rent amount at the end of each lease term. If the tenant opts to lease again instead of buying, the landlord can pump up the rental price to compensate for the lack of profit, creating financial strain for the tenant.
- Dependence on the landlord for repairs and maintenance: When issues arise in the home, such as a leaky roof or a broken dishwasher, the landlord or property manager may be slow to address maintenance concerns. Because the lease agreement prohibits repair efforts from the tenant, problems could languish for months before being addressed.
- No control over service agents: As a tenant, you may not control the service agents or contractors hired by the landlord for repairs or maintenance. In addition, the tenant must abide by the timeline that the landlord and service agent agree on, meaning they may have to be present at the house at inconvenient times.
- Risk of losing the option fee: In a lease option agreement, the tenant pays a non-refundable option fee for the right to purchase the property at a later date. As a result, if the tenant decides not to exercise the option or cannot obtain a mortgage in time for the purchase, they'll lose thousands of dollars.
- Longer commitment than renting: Leasing a home involves a commitment to a fixed term of at least 1 year. The contract requires you to stay in the property for the duration of the lease, even if your circumstances change. Breaking a lease early can result in losing your option fee and paying the agreed-upon monthly rent until the landlord finds a new tenant.
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Buying Vs. Leasing A Home: What Is The Difference?
Leasing a property involves lower upfront costs and a more flexible commitment than owning. As a tenant, you typically pay a security deposit and monthly rent without needing a substantial down payment. Leases typically have fixed terms, which may include a lease option that allows (but doesn't require) the tenant to buy the home when the contract expires. Additionally, the landlord is generally responsible for property maintenance and repairs.
On the other hand, owning a property requires a significant down payment and additional closing costs, making it a more substantial financial commitment. While homeowners build equity in their property over time, they are responsible for mortgage payments, property taxes, homeowners insurance and all repairs/maintenance. Homeowners also have greater control over the property, including the ability to make modifications and renovations to suit their preferences and needs. Additionally, property ownership offers the potential for the property to appreciate over time, serving as a long-term investment.
What Is The Difference Between A Rent And A Lease Agreement?
A rental agreement, often called a month-to-month agreement, provides a more flexible and short-term arrangement for landlords and tenants. It typically lasts 30 days and automatically renews unless either party gives notice to terminate. Rent changes and adjustments can occur more frequently, and the security deposit required is generally smaller than a lease agreement. However, this flexibility can come at the cost of less stability and the potential for more frequent changes in living arrangements. Remember, a rental agreement doesn't give the tenant an opportunity for ownership.
Conversely, a lease agreement outlines a fixed term, commonly 1 year or longer, providing a more stable and long-term commitment for both parties. It is a formal, written contract that specifies in detail the responsibilities and rights of both the landlord and the tenant. While a lease agreement offers security and stability, it also involves less flexibility, as the terms for the agreed-upon duration bind both parties. As a result, leasing is a rent-to-own arrangement with firm boundaries that govern the tenant-landlord relationship for a year or more.
Types Of Residential Leases
The following are the common types of leases and how they differ. Each one offers pros and cons to tenants and landlords.
- Absolute net lease: An absolute net lease is where the tenant is responsible for all costs associated with the property. The tenant pays the rent, property taxes, insurance, and maintenance expenses. In essence, the tenant takes on the financial responsibilities typically borne by the property owner.
- Triple net lease: A triple net lease requires the tenant to pay for the rent, property taxes, insurance and repairs but leaves the ultimate responsibility with the landlord. As a result, the landlord usually sets a budget for these costs at the beginning of the year and collects 1/12th of the total cost from the tenant each month. In addition, the tenant may be on the hook if these expenses go over budget, meaning they'll pay even more at the end of the year to reconcile the discrepancy in cost from the landlord's budget.
- Modified gross lease: A modified gross lease is a hybrid lease structure that requires the landlord and tenant to share the load of expenses. The specific terms depend on how the two parties negotiate the responsibilities. For example, the tenant may cover rent, utilities and repairs while the landlord pays for insurance and taxes.
- Full service lease: A full service lease is where the landlord assumes responsibility for most or all of the property's operating expenses, including property taxes, insurance, maintenance and utilities. The tenant pays a fixed, all-inclusive rent amount, making it a more straightforward and predictable arrangement for the tenant.
What Information Is Included In A Lease Agreement?
Although lease agreements vary by landlord and property type, all contracts should include the following essentials:
- The address of the property
- The responsibilities of the landlord and tenant
- The rent amount
- The security deposit
- Rent payment due date
- Breach of contract consequences
- The lease agreement duration
- Pet policies
- Occupancy limits
- Illegal activity clause
When Can You Break A Lease?
A renter or tenant may have valid reasons for wanting to end a lease agreement early. For example, you may want to relocate for a job, leave for health and safety reasons, or purchase a home. However, breaking a lease involves financial implications unless you're in a protected group.
Specifically, breaking your lease will incur financial penalties, such as losing your security deposit or paying the rest of the rent you would owe through your lease's duration. For this reason, it's usually best to find an alternative, such as subletting your rental unit or switching to a monthly arrangement if your landlord allows.
Remember, certain groups of people have governmental protections when ending a lease early. The following qualifying circumstances place tenants into a protected group:
- Military: The Servicemembers’ Civil Relief Act allows active-duty military members to break their lease if it interferes with orders. In addition, the law allows them to break a lease to give their families financial relief.
- Domestic violence victims: Victims of domestic violence can notify their landlord in writing that they’re breaking their lease. The tenant must also provide legal backing for this claim, such as a copy of an order of protection or supporting documentation from a law enforcement agency.
- Adults with medical disabilities: Adults with debilitating medical conditions who need to move to access better healthcare can break their leases without penalty.
Leasing A House FAQs
The answers to the following frequently asked questions about leasing a house can clear up any lingering confusion.
Which is better: renting or leasing a house?
Renting a house puts the least obligation on the tenant and reduces housing costs. On the other hand, leasing involves more fees but gives the tenant the option to buy the house at the end of the contract. As a result, a tenant who wants to become a homeowner but needs more time to strengthen their finances can benefit from a lease, while renting gives you more freedom to move.
What is the difference between a lease and a let?
Leasing is renting from a landlord with an opportunity to buy the property in the future. A let is another word for a rental unit, meaning the tenant pays a monthly fee to live in the property. Letting or renting involves less responsibility and cost.
How can a lease affect my credit score?
A lease might boost your credit score if your landlord reports timely payments to the credit bureaus. On the other hand, breaking the lease and refusing to pay the required fees to your landlord will hurt your credit score.
What is a verbal lease agreement?
A verbal lease agreement means the landlord and tenant discuss the terms of the lease but don’t sign legally binding documentation that spells out the agreement. Doing so can be risky for tenants because signed agreements provide proof of what the landlord agreed upon from the outset.
The Bottom Line
Understanding the nuances of lease agreements is crucial for both landlords and tenants. A lease purchase agreement offers a potential path to homeownership, while leasing a house provides flexibility and benefits like no down payment and reduced responsibilities for repairs. However, it's essential to know that rising rent costs and dependence on the landlord for maintenance could create challenges. In addition, renting may be better if you want to move shortly or to minimize housing costs. Whether you’re a tenant with a lease or looking at the conventional route of homeownership, you can take the next step by filling out an online mortgage application today.
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