October 07, 2010

The Quick Guide to Lease-Options

Lease-Options, also referred to as rent to own, rent2own,
lease-purchase, as well as a few other names, is a very misunderstood
concept in the real estate market, even with many real estate agents. 
Hopefully, this new series will help people learn what a lease-option is
(and maybe isn't), and when it may be a good idea to offer it.

As stated, the term lease-option is often used interchangeably with those above, but strictly speaking there are differences between them.

A Lease-Option is an agreement between the owner of the property (usually called the landlord/seller) and a person(s) interested in owning the property (usually called the tenant/buyer).  As the name implies, there are two basic parts of Lease-Option

The Lease:  The lease in most lease-options is like a "normal" lease in any rental situation.  The length can vary from 6 months up to 3 years (depending on state laws) and is usually negotiated at the time of contract between the landlord/seller and tenant/buyer.

The Option:  This is where many get confused with a lease-option.  The option is an agreement between buyer and seller giving the buyer the option, but not the requirement, to buy the property within a set time frame.  When an option is put together with a lease, the time frame is most often the same length as the lease (for example, a one year lease with a one year option).  To make an option valid, the buyer has to pay to the seller an Option Fee.  Most options used in conjunction with a lease also have clauses that make them voidable by the seller if the lease is violated in any way.

The Option Fee:  This, too, is often misunderstand.  The option fee is paid to the seller by the buyer for the right to hold the seller to a specific price AND to prevent the seller from selling to another for a set amount of time (ie, 1 year option).  The option fee is NOT a down payment on the property, though in many lease-options, the seller does agree to count it towards the purchase price IF the option is exercised (the buyer decides to buy).
The option fee is NOT a security deposit.  A security deposit may be required as part of the lease, though.
In most cases, the option fee is NON-REFUNDABLE. Again, this may vary with your state laws and can be negotiated upfront, but, generally speaking, the option fee is the seller's money as soon as it is given by the buyer.  Why?  This is the fee the seller has agreed to accept for taking the property 'off the market' for time specified.

Finally, lease-options may not be legal and valid in all states.  Please review your state laws before considering a lease-option transaction.


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