How to Prepare a Real Estate Lease Option Contract
The lease-purchase, or lease-option contract, in which the seller leases a home on a contract that gives the renter the option to buy it, can help the seller and the prospective buyer, as long as both parties are fair-minded.The seller gets out from under the mortgage, and the buyer has an opportunity to save up for a down-payment while at the same time living in the house.
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Instructions
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Decide on basic terms. How long will the lease term be? Will it be renewable? If so, how many times may it be renewed? Will the tenant be allowed to make changes to the property? If so, of what nature? What maintenance will you perform and what will the tenant perform? Who takes of the yard and snow removal? What will happen if the rent is late? What will the rent be? How much of it will apply to the purchase price? What will the purchase price be? How much will the option money be?
Make sure you charge enough rent to cover the taxes and insurance.
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Find out what fair market rent is if you agree to let the tenant apply part of the rent to the purchase price. When the tenant is ready to go to the bank to get a mortgage, the bank will want to see the contract and will check fair market rent (FMR) against the Department of Housing and Urban Development's data. No matter what you've agreed on, they will let the buyer apply only that portion of the rent that is above HUD's fair market value figure.
Do this before you ever decide on a rent figure and make sure you charge more than fair market value, other wise the buyer will not be allowed to use any portion of the rent as part of the down-payment (See Resources).
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Get a state-approved lease-purchase contract. It may actually be two contracts: a lease and a lease to purchase agreement. Many websites sell them for $10 to $20. Though you will fill in the blanks, the lease-purchase contract will contain all the legalese and will cover contingencies that may not have occurred to you.
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Go over each point in the contract. If something doesn't work for you and your tenant, you can cross it out. In the margin next to the change, both parties have to initial and date the change. Be careful about this--there's probably a very good reason for that point to be there.
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Add amendments. If you and the tenant agree on something that is not covered in the contract, you can add it as an amendment. For example, maybe the house is going to need a new roof in about a year and without it, the house will not appraise well and the buyer won't be able it get a mortgage. You agree to have a new roof installed within 10 months. Put it in writing in an amendment.
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Disclose, disclose, disclose. If you know that the roof leaks in the back quarter or that there is asbestos siding under the vinyl siding or anything else, tell the tenant who is your prospective buyer and have them acknowledge it in writing: "Buyer is aware of leak in back quarter of roof and agrees that seller is not responsible for repairs or ensuing damage. The property is being sold in 'as-is' condition."
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Make sure everything is in writing. Verbal agreements are worthless.
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Consider having a real estate attorney look at the final agreement, but do this before everyone has signed it. Encourage your tenant to have a real estate attorney look at it also.
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Tips & Warnings
Tell your tenant to save the canceled rent checks. They are part of the documentation the bank may require.
Tutor your tenant on home maintenance. Many people new to home ownership don't always know basics, such as not to ignore a leaking faucet that could lead to bigger trouble.
Tutor your tenant on how to raise and then maintain a good credit score.
Underwriting rules at the banks change frequently. What the buyer's bank accepts today may not be acceptable a year from now.
