There are so many ways of selling and buying real estate today. Leasing with an option to buy is one of the most creative options for those who have bad credit or even no credit. The tenants who want to purchase but are not currently in a good position to buy can use this to lock in a price against future appreciation. It is also a good tool used by owners and property managers to attract quality tenants. And its also used by property owners that, for whatever reason, is not renting or selling at the price they want.
What Exactly is a Lease with an Option?
Leasing with an option to buy is pretty much what it sounds like – a renting tenant signs a contract with a landlord stating that the tenant can buy the property at the end of a time period. The owner is then obligated to sell at the option price, however the tenant is not obligated to buy. But once a lease-purchase is exercised, the buyer is then obligated to buy at the end of the rental period.
A popular misconception is that once the landlord signs the agreement, she has to sell the property to the tenant, or that the tenant has an absolute right to the property. That is not the case. Actually the tenant can buy the property only if the landlord exercises the option to sell.
The Pros and Cons of Leasing with an Option
As with everything, there are definitely pros and cons on both sides – property owners are in a secure position with a lease/option to buy contract than if they held a mortgage, because they still own the property. The Seller also receives the rental income and gets tax deductions. For the buyers, the best draw is that they get more time to qualify for mortgage financing.
Before entering into the agreement, a written document must be written that specifies the terms of the contract prior to the tenants moving in. Because the tenant and the seller are entering into two separate legal agreements– a rental contract and purchase contract – having an attorney involved to be sure all bases are covered is highly recommended.
The option needs to be be recorded with the county clerk to put people on notice of the tenant's rights, preventing the seller from selling to another buyer.
The lease agreement must have a clause that terminates the option to buy if the tenant violates the lease or gets evicted before the closing.
Make sure you address the following in your contract:
Within the lease agreement, a security deposit required. Some states do not allow the security deposit to surpass one month’s rent.
The purchase price should be set according to today’s market, not in the future when the option may be exercised. This could be good news or bad news, depending on whether real estate prices go up or down during the lease. Another option is the “right of first refusal,” this means the tenants have the option to purchase the property at a price determined by the landlord at the time of sale and not at the time of the agreement. The tenant may also have the right to buy the property at the price offered to the landlord by another prospective buyer.
An option to buy doesn’t give the tenant legal title to the property. The tenant becomes the purchaser upon exercise of the option - then the landlord/tenant relationship ends and the option becomes a binding contract of sale.
This is a unique option. The tenant pays above-market rent for the property, but a portion is credited toward the purchase price if the buyer decides to exercise the purchase option. If the tenant decides not to buy, they don’t get the rent credit money back. This is one of the biggest incentives for a tenant to buy.
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