Posted by: Todd Long | July 26, 2008

Lease Option

We are experience a few “out of the box” home selling techniques in this market.  A lease option is one example.  This may be a good option for a buyer and a seller under certain circumstances.  For example: if the seller doesn’t need to cancel the debt on his/her current home in order to purchase another home.  Or, the buyer doesn’t qualify for a loan because they are self employed for less than 2 years.

I’m going to outline one way a lease option may be structured but I highly suggest you and your Real Estate agent enlist the help of a qualified Real Estate attorney if you are going to enter into a Lease with Option to buy or Lease Purchase agreement. 

There are a few details that need to be thought through before structuring your Lease Option.   1) How long of a lease term, 2) how much of the monthly payment will be applied to the option money (down payment), 3) how much will be paid up front to secure the contract, 4) how will repairs be handled 5) at the end or the lease option what will be the purchase price?  So lets cover a few of these.  How long of a lease term many times this will depend on why you are considering a lease option in the first place.  The buyer may just need 6 months to qualify for his loan as in the example above.  Other time the buyer may be trying to place 20% into the option money pool which will then be their down payment for the loan. 

That leads me to number 2 from above.  The amount of the monthly payment will vary depending on many factors: the amount the seller needs coming in each month to cover expenses, the amount the buyer can afford each month, or the amount negotiated towards option and rent.  Normally there is an amount of each payment that applies toward the option amount that is being paid from buyer to the seller to apply to the purchase price if the buyer decides to exercise the option at the end of the term.  For example if the monthly payment is $1000 then $500 of that could be going towards the option and $500 could be rent.  No matter what, that $1000 is paid to the seller each month and is not refundable.  If the buyer exercises the option at the end of say 2 years they would have $12,000 as down payment they have already made to the seller towards the $100,000 purchase price.  Usually the final purchase price is established at the outset of the Lease Option contract.  This can be a little trick to predict what the future value of the property will be in 2yr, 3yr, or 5yrs.

Often the upfront money from buyer/lessee to seller/lessor is considerably higher than a standard security deposit of 1 1/2 times the monthly rent.  The upfront money to secure the contract may be 5%-10% of the purchase price.  But this money does typically apply to the purchase price if the buyer exercises the option.  From the seller’s point of view this upfront money needs to cover any cost that are incurred such as moving expenses and real estate commissions.  Speaking of real estate commissions the NC Exclusive Right to Sell Listing Agreement paragraph 8 details the total fee to be paid from the seller to the agency.  “Such fee shall be deemed earned under any of the following circumstances:” 8b “If the ……. Seller agrees to sell, exchange, convey or transfer the Property at any price and upon any terms whatsoever, during the Term of this Agreement or any renewal hereof”.  So a fee is due.  My opinion is something could be worked out where the seller pays a portion of the fee at the initiation of the lease option and the rest a closing of the transaction.  However, that is not the wording in the listing agreement and would need to be worked out on a case by case basis.

Repairs can be handled many diffrent ways but I have had a good experience having the buyer/lessee cover all repairs up to $100 and any single repair over $100 is split 50/50 with the seller/lessor.  You will need to work out how estimates are acquired and so on. 

As you have read above, many of the terms and conditions of the lease option are negotiable and can be handled in many diffrent ways.  As I mentioned before I highly suggest you enlist the help of qualified professionals if a lease option seems like it might be a solution to your real estate needs.

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Responses

  1. Todd,

    I thoujght this was a great article. One other point, I have always heard that the lease and the option / contract to purchase need to be on two seperate documents that would each stand alone. But you’re right, it can get very cumbersome and oomplicated. An attorney would be a big help if not a necessity.

  2. Good information, Todd. More and more, agents are fielding the question, “Will your sellers consider a lease purchase?” While your post provides good help in how to structure this kind of deal, I am finding very few sellers that want to consider this type of offer.


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