Lease With Option to Buy Facts
Even many real estate brokers and agents don't realize that a lease-option on a parcel of real estate involves two separate transactions. The first is the lease and the second is the option. Each is a separate property interest whose transfer and consideration requires separate documentation.
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The Option
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An option is a right to buy at a certain price and usually within a time period. Sometimes, a developer will buy an option on a parcel of land so he can tie up the property and complete a feasibility study, yet not have to pay upfront for the whole piece of ground.
But whether or not a lease is involved, the sale of an option transfers a property interest for money and should be treated as such. For example, Mickey pays Donald $5,000 for the option to buy Donald's house for $200,000 within the next 12 months. The sale of the option is a transfer of interest affecting the title of Donald's house.
The Lease
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A lease is nothing more than a rental agreement. While they can be month-to-month, they are usually for a fixed amount of time.
But they are a transaction unto themselves and have to be written as such. Mickey pays Donald $1,000 per month for the right to use Donald's property. The lease affects the title because it's a transfer of a property interest.
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Lease + Option
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New construction For individual buyers and investors, options were more common in the 1970s and 1980s than they have been recently. Fewer mortgage financing programs were available in those years than in the past few. In the current housing market, where individuals and companies own surplus homes and fewer buyers than before can obtain mortgage financing, options are again coming into use, usually accompanied by a lease.
In the most straightforward lease-option scenario, Mickey pays Donald $5,000 for the option to buy Donald's house for $200,000 sometime within the next 12 months. In addition, Mickey pays Donald $1,000 per month rent in a one-year lease.
Lease-Option Variations
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Lease-option agreements for individual buyers and sellers can vary in accordance with human imagination, but they usually share one of more features: some or all of the option fee is credited to the down payment; some of the monthly charge pays the option fee, while the rest goes to rent; and none of the option cost is refundable if the option holder does not buy the property.
Word of Caution
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Real estate brokers and agents sometimes have forms for lease-option agreements. Forms are also available in office supply stores. However, it's best to have an attorney prepare and/or review the documents.
Leases can be fairly complex, option agreements even more. A lease-option agreement is more complex than the sum of its legalistic parts. Lay people are not qualified to write the precise language necessary in a lease-option document that will forestall disagreement and poor communication.
Where to Find Candidates for Lease-Options
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New construction: builders, especially smaller, "spec" builders, may have completed homes they couldn't sell. Since they're paying interest monthly on their construction loans, they may be motivated to agree to a lease-option.
Homes that didn't sell: Sometimes an owner needs to sell a home but can't in the current market. While renting the home will help him cover his monthly bills, a lease-option dangles the possibility of selling the home altogether at some point.
Absentee owners: Owners who live in another city often have the same motivation as owners whose homes won't sell.
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Resources
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