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How does lease-to-own work?

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Quick Answer

Unlike standard leasing contracts, lease-to-own agreements add the option of outright purchase to leasing agreements, notes Ownership Solutions. Also known as rent-to-own or lease-option agreements, these contracts give lessees the right to purchase the subject of a lease at any point during the lifetime of a contract.

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Full Answer

Lease-to-own agreements are typically used to acquire tangible goods such as furniture and vehicles, says Wikipedia. These contracts are particularly popular in the real estate industry, says CNN Money. As of November 2014, the typical lease-to-own home agreement requires lessees to pay a fee equivalent to 5 percent of the purchase price at the signing of the contract. In addition, lessees are required to pay extra cash on top of their regular monthly rents. The additional payments are used to gradually pay for the home in question. Lease-to-own contracts have a number of advantages. First, they allow prospective buyers to sample goods before purchase. They also provide a way of acquiring expensive products to those with limited financial means. In the context of the real estate industry, lease-to-own contracts give those with poor credit time to polish their profiles before looking for a mortgage. However, these contracts have a number of advantages. First, there is little protection for lessees. If they fall behind in their payments, they lose their investment. There is also always the risk of lessors diverting the extra payments to unintended uses instead of paying off the purchase price of a house. And if lease-to-own contracts lock in the price of a house at the signing, lessees may find themselves at a disadvantage if house prices fall afterwards.

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