How to Write a Lease Option Contract
A lease option contract is a formal legal contract in which the leasing party agrees to pay a higher rent to lease the property (or item) in exchange for the option to purchase at a given price. Such contracts commonly exist for rent-to-own property. There are several important things to be aware of when writing a lease option contract.
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Instructions
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Specify the payment amount and terms. This refers to the amount of money the person leasing the property (the leasee) will pay and how often he will pay. Most commonly, this is stated in the form of a monthly payment. For example, the contract may specify that the leasee has to pay $500 per month. Generally, the payment is slightly higher than the amount the leasee would pay if the contract was simply an option to lease instead of a lease with an option to buy.
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Specify the purchase price if the option is exercised. This refers to the price the leasee will pay if he does decide to buy the item he is leasing. For example, the lease option contract may specify that the leasee has the option to buy the property for $150,000. The specification of the lease option price is important, since the benefit of locking in the given price is usually one of the major benefits for the leasee of structuring a real estate deal in this manner.
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List the date by which the option must be exercised. When a lease option contract exists, the leasee normally has only a set period of time in which to decide he wants to buy. For example, a lease option contract may specify a one year option or a two year option. If the contract specifies a one year option, the leasee must purchase the property at the end of that year or he forfeits his option to buy.
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Specify what occurs if the option is exercised. In other words, if the leasee does decide to buy, what will happen to the payments he has made over the course of the term of the contract. This provision will dictate whether his monthly payments are applied to the down payment of the home, for example. It will also stipulate exactly what the leasee must do to exercise the option. In other words, it may say that the leasee has to secure a mortgage to pay for the property in full within 30 days of exercising the option.
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Specify what occurs if the option is not exercised. This means that you will need to write in the contract what will happen if the leasee decides not to purchase the property. Most commonly, he simply forfeits the extra payments he made (the payments above what it would have cost him if he wasn't just renting) because those payments were made in order to buy the right (the option) to buy, even if he ultimately decides not to take the option.
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Have an attorney review the contract. Writing a contract for sale is complex and all contingencies should be included. While you can generate a sample contract yourself, in order to protect your legal rights and ensure compliance with all local laws, any legal contract should be reviewed by a qualified legal professional.
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References
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