What Is A Lease Option?



As I have mentioned in previous articles, there are more than one way someone can sell or buy a home other than the traditional list and hold method, or even an auction. Depending on what part of the country you live in, and the condition of your home, you may need to get creative in your marketing efforts.

There are many potential home buyers out there that have money for a good down payment but have some credit issues and need some time to get them corrected. On the other hand, there are people out there that have good credit but no money to put down on a home. Are these folks just plain out of luck when it comes to purchasing a home?

Then we have sellers with homes that have sat on the market forever and ever without any offers. The reason can be various such as bad location, overpriced, home needs updating or just too much work is needed. In some cases I have seen beautiful homes in great condition just sit there. Are these sellers, like the buyers above, just plain out of luck when it comes to selling their home?

The answer to both scenarios above is “perhaps not.” Lease Options could be the answer for both the buyer and seller. This brings up a question, “What is  a lease option and how does it work?”

One of the dictionary definitions of a lease is: “a contract by which one party conveys land, property, services, etc., to another for a specified time, usually in return for a periodic payment.” A rental agreement is sometimes used synonymously with a lease agreement.

Under a lease option agreement, there are two separate agreements, viz., the lease (rental) agreement and the option to purchase agreement. Each agreement is a legal binding agreement. A rental agreement provides for a tenancy of a short period (often 30 to 180 days) that is automatically renewed at the end of the period unless the tenant or landlord ends it by giving written notice. For these month-to-month rentals, the landlord can change the terms of the agreement with proper written notice.

A written lease, on the other hand, gives the lessee the right to occupy a rental/lease unit for a set term — most often for six months or a year but sometimes longer — as long as the tenant pays the rent and complies with other lease provisions. The landlord cannot raise the rent or change other terms of the tenancy during the lease, unless the tenant agrees.

Unlike a rental agreement, when a lease expires it does not usually automatically renew itself. A tenant who stays on with the landlord’s consent after a lease ends becomes a month-to-month tenant, subject to the rental terms that were in the lease.

Under the lease option agreement, the buyer puts down a non-refundable “option fee”. As stated this “option fee” is non-refundable if the lessee/buyer does not perform according to the Option to Purchase agreement and in some cases, the lease agreement is tied to it. Again, this agreement is separate from the lease/rental agreement but, as stated,  a violation of one agreement could void the other agreement.

There are pit falls for both the seller and the buyer. If the buyer does not perform, the option fee, which could be 3 to 5% or more of the purchase price, is forfeited. The seller runs the risk of getting back a home that is in a worse condition than before it was leased out or runs the risk of a double payment (his current home and the leased home) if the lessee/buyer defaults on their payment.  A good property manager can prevent this.

If you have a situation you would like to discuss with us, give us a call at 252-257-4822.

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