subject: Home Buyers Should Consider A Lease Option Agreement [print this page] You may be wondering if there's a difference between a lease purchase agreement and a lease option agreement. Well, although they sound similar, they are not. As a buyer you would want to be sure to understand how they differ, and as a seller or landlord you want to exercise caution as well. As I am giving consideration to my options and selecting how to sell my house when I have potential buyers who need a year or so to qualify for a mortgage, we usually discuss rent-to-own, which is a rather common phrase but not exactly a legal term. A lawyer would call it a lease purchase agreement, so that's what I'm calling it in this article.
People often confuse a lease option agreement with a lease purchase agreement because both involve tenants or buyers moving into a home before closing, which is when ownership actually transfers from the seller to the buyer. Here's the important difference - people who move into a home having signed a lease purchase agreement are buyers because their contract is set up as structured payments to buy the home. Generally it means they are making monthly payments to the seller for one or two years while they get financing to buy the home.
Let's go over this again - a lease purchase agreement is a written agreement to purchase a home over time, usually two or three years, and it includes as part of the agreement a clause allowing the buyer to live in the house making lease payments while he arranges to obtain financing to pay off the seller.
But a lease-option agreement is primarily an agreement to rent a home, and the agreement contains a clause granting the renter the option of purchasing the real estate by a certain point in the future.
Although a lease purchase agreement is sometimes referred to as a rent-to-own agreement, that term is not really correct. But people understand that phrase and sometimes I've used it myself when I'm trying to explain how to sell my home to interested buyers. When I say rent-to-own it helps them grasp the topic, but then I use the correct legal terms while encouraging them to take the agreement to an attorney to check it out.
When I'm talking to homeowners and they are interested in my home for sale, but they don't enough money for a down payment, I often make a suggestion that solves the problem for all of us. Commercial real estate agents use lease option agreements, but the form is not used in residential real estate as often. It's actually a lease agreement with an option, an opportunity, to buy the home later at a certain price. Residential real estate agents won't be much help with this arrangement, so I'm always ready with the form I had my lawyer prepare for me.
Since I am the landlord and the seller, when I sign a lease option agreement I am allowing the future buyers to move into the home and make monthly lease payments so that I can sell my home quickly. At the time they sign the lease the buyers may pay me a fee and there may be an additional amount added to each payment, both of which are credited towards the sale price of the house. The fee covers two advantages and they are really paying for the privilege of having these advantages. First, a purchase price that doesn't change during the lease agreement of one or two years is a great advantage when market prices are rising. And second, they are assured that no other buyer can appear and buy the house from me at any price. The tenants are protected. Having the option, they are protected. Both the up front and monthly portions of the option fee are credited to the buyers when they close on the sale. If they never close on the sale they forfeit the option fee money. That money represents my compensation for keeping my home off the market and making it unavailable to other buyers during the term of the lease.
You have to remember that I have the obligation to sell them the home but they are not obligated to buy it. They have flexibility. That's why a lease option agreement is often a good solution for the buyers and also for me when I need to sell my home quickly, or at least know that the payments are covered by tenants who have the intention of buying it. If it's done correctly, a lease option agreement works for everybody, when the proper forms and understandings are in place from the beginning.
I've discovered that most people believe there are only two basic ways to get into a house, renting or buying. But when I'm thinking about how to sell my home sometimes I consider another option, and it's called a Lease Option Agreement. If that seems like a good fit in a certain situation I share some facts , the same things I'm sharing with you in this article, to inform the potential buyers that there may be another way for them to move into my house. Usually they are pretty interested in what I have to say.
Real estate brokers are not fond of lease option agreements because sometimes they lose out on their commission, so it's a good idea to ask your attorney for a form to use if you are considering this alternative way to sell your house. Nothing I'm sharing here is legal advice of course, I'm merely telling you how I've used lease option agreements in the past and how you might use them, too.
I doesn't matter if we talk about a stock option with a corporation or a lease option agreement on some real estate, what they have in common is the word "option." Both corporate stocks and real estate can be sold and purchased as an "opportunity." This is how it works - an option is basically an opportunity to buy something tangible, such as a share of corporate stock or a house, at a specified price on or before a specified date.
Let's repeat that last sentence again, "an option is basically an opportunity to buy something tangible, such as a share of corporate stock or a house, at a specified price on or before a specified date."
I think about a lease option agreement in a simple way, and that's how I explain it to potential buyers who are getting interested in a house to the point that I begin seriously considering how to sell my house to them:
I give the prospective buyers a lease agreement to sign that is set up for the term of a year for a specific monthly rental amount. The lease agreement includes an option, which is basically an opportunity to get the privilege of having "dibs" on the house, which means that no one else can show up and buy the house out from under them. The buyers know how much their payments will be each month, and they know an exact date they have to tell me if they are going to buy the house or not. If they don't contact me in writing and "exercise their option" which means they agree to buy the house, then they lose their option. They no longer have dibs.
The "option fee" is a dollar amount paid when the lease is signed as a one-time fee, or it's added to the monthly payment stated in the lease agreement. An option fee is not refundable if the people choose not to exercise their option. A lease option agreement gives them an opportunity to purchase their leased home at a negotiated price by a certain date, and after that date the arrangement ends and they lose all the money they put towards the option.
