The Basics Of a Lease Option Deal
The renter, in a lease option deal, leases the house, for a fixed term, usually around a year, and sometimes more. The renter pays an upfront fee, which could be considerable, along with a monthly rent, which could be more than the normal monthly rent. The upfront fee and the extra amount of rent paid over the market rent go into a fund for lease option consideration. This allows the tenant the option to buy the rented property at a predetermined agreed upon price during the term of the lease. Certain provisions could be added to the deal allowing for the changes as per the consumer price index.
If the renter decides to exercise the option of buying the house, both, the upfront money paid, and the amount paid every month over and above the monthly market rent goes towards down payment. If, for some reason, the renter decides not to buy the house, all the extra money paid is forfeit.
Protecting Your Option
The lease option is generally known to be slanted in the favor of the renter. However, the deal starts to sour when the seller decides not to keep his side of the bargain. Of course, you, as a buyer, can take recourse to law, but that could take years and a bundle in legal fees, before you force him to sell. It is always better if you start by trying to protect your investment, in the following ways:
- Recording Your Option 每 Ensure that you sign your option in the presence of a notary, and record it in public real estate records. The alternate to the option not being notarized is to sign an affidavit known as a "memorandum of option" and file it in the real estate records. Though this does not create a lien, you give the world a public notice of your interest.
- Create An Escrow 每 What option do you have if the seller dies in the meanwhile, or disappears? How are you going to get him to sign the deed? Create an escrow up front in which an attorney holds the executed deed. When you decide to exercise the lease option, you simply arrange to hand over the money to the escrow agent and collect the deed.
- Record a Mortgage 每 Remember, a mortgage can be recorded to secure performance of any agreement, even a purchase option. You, the buyer, can have a mortgage recorded to secure a payment on a promissory note. You now become a lien holder, similar to the position of a secured lender. If in the event the seller refuses to sell, you simply foreclose. To protect himself, now it is the seller who has to approach the court, and not you!
Seller Advantages
A look at the seller advantages in a lease option deal.
- High Option Price 每 If there is a strong buyer demand for a lease option, the seller can ask for, and get, top dollar for the property. In normal circumstances, the option price is the market value at the time of signing the lease option. If the property prices increase, you benefit, and if the prices fall, you would probably opt out, and the seller gets to keep the extra money put down.
- Above-Market Rent - The seller usually asks for extra rent, over and above the market rent, usually 10 to 20 percent above. This is an advantage to the seller.
- Tax Deductions - During the period of the lease option, the seller gets all the property income tax deductions.
Buyer Advantages
Lease option deals offer some advantages to you, the buyer, as well.
- Small Up-Front Cash Required 每 In lieu of a security deposit, usually a small amount of cash, upfront, is required to acquire a property on a lease option.
- Monthly Rent Towards A Down Payment 每 What is unique about a lease option deal is that the extra rent you pay over and above the market rent is credited towards your down payment. The extra cash you have dished out motivates you to exercise your option to buy.
- Leverage Over The Property 每 Another unique advantage you, as a buyer, have is the ability to control a property with very little cash, and profit from the appreciation in the market value of that property. In addition, it gives you another advantage of trying out the property, before buying. If you find the property not to your liking, you can walk out of the deal without having tied down a lot of cash.
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