Why Lease-Purchase Real Estate Deals Are a Bad Idea in Alabama

Lease-purchase agreements—often marketed as a path to homeownership for buyers with limited credit or savings—can seem attractive at first glance. But in Alabama, these hybrid contracts frequently create more problems than they solve. Whether you're a buyer, seller, or investor, understanding the legal and practical risks of lease-purchase deals is critical before entering into one.

Unlike traditional real estate transactions, lease-purchase agreements in Alabama do not benefit from the robust consumer protections found in mortgage lending laws. Buyers under these contracts are typically treated as tenants—not equitable owners—until the purchase option is exercised. That is why the court systems seem to try to find ways to rule in favor of the tenant/purchaser: If you are the landlord/seller you will likely lose in court. (See this month's McCain v. Sneed Alabama Supreme Court Case)

Predatory Practices and Exploitation

Lease-purchase deals are often marketed to vulnerable buyers—those with poor credit, limited savings, or recent bankruptcies. In Alabama, this has led to a pattern of predatory behavior the Court System abhors:

-High upfront option fees that are non-refundable

-Above-market rents with no guarantee of financing at the end

-Balloon payments that buyers are unlikely to afford

-These deals can trap buyers in a cycle of default and eviction, while sellers recycle the same property through multiple failed lease-purchase arrangements.

-No foreclosure process: If the buyer defaults, the seller can often evict them through a simple unlawful detainer action, bypassing judicial foreclosure safeguards.

-No equity protection: Buyers who have paid substantial “option fees” or above-market rent credits may lose everything upon default, with no right to recoup their investment.

-Ambiguity and Enforceability Issues: Alabama courts scrutinize lease-purchase contracts closely, especially when they blur the line between tenancy and ownership.

Poorly drafted agreements can be found unenforceable or to be disguised financing arrangements, triggering unintended consequences:

-Usury violations if the deal functions like a loan with excessive interest.

-Title clouding if the buyer records a memorandum of agreement, complicating future sales or financing.

-Litigation risk from disputes over repairs, taxes, insurance, or who bears the burden of property maintenance.

Better Alternatives

For buyers: Consider credit repair and FHA-backed financing, which offer real ownership and legal protections.

For sellers: Explore seller-financing with a recorded mortgage and promissory note, which provides security while complying with Alabama law.

For investors: Use lease-only or sell with a deed with clear compliance to Dodd-Frank and Alabama’s mortgage statutes or consult with Attorney Jennifer Scruggs to structure safe contracts that will stand up in court

Conclusion

Lease-purchase agreements in Alabama are fraught with legal ambiguity, financial risk, and practical pitfalls. While they may seem like a creative solution, they often leave both parties exposed. A better approach is to pursue transparent, legally sound alternatives that protect all stakeholders and ensure long-term success. A one-sided contract will be struck down in Alabama Courts.