A Lease Option is a form of “Rent to Own”. With a Lease Option the prospective Buyer/Tenant rents from the Seller/Landlord for a period of time. Included in the agreement is the right to purchase the property under certain terms and agreements at an agreed upon price. Because the Tenant has the absolute right to purchase the property and (unless prohibited in the lease agreement) may also sell their Option, the Lease Option agreement is considered weighted on the side of the Buyer/Tenant, who is not legally bound to ultimately purchase the property and yet the landlord has no assurance the tenant will ultimately purchase yet his hands are tied because they cannot sell to someone else even at a higher price or better terms during the Lease Option term.
In economic times when financing is difficult and banks not loaning, the Lease Option arrangement has become extremely popular. An owner who must relocate or can no longer keep up the property is often willing to go ahead an allow a buyer prospect to lease with an option to purchase as a way to offset a mortgage payment they cannot afford in order to preclude foreclosure, particularly if the buyer/tenant has a reasonable option consideration even though the buyers credit (for one reason or another) is less than perfect.
With an Option provision incorporated into the Lease Agreement, the tenant is much more likely to consider the house as their personal residence therefore taking care of upkeep and maintenance both inside and out as if they already were a homeowner.
Benefits accruing to the Tenant could be:
- Rent payment may be allowed to partially go towards ultimate down payment
- If the market value declines during the lease, they can get out of purchasing
- If their old home hasn’t sold or they prefer no to sell in a buyer market, they have the opportunity to wait until market conditions improve
- If seller/landlord is sufficiently motivated they may be able to negotiate a lower than market price
- In a buyers market they may be able to negotiate very low up front option consideration
- If there is no prohibition against assignment of the option and prices escalate during the Lease Option period, they may be able to sell the option at a profit.
Safeguards and Pitfalls for the Tenant Buyer
As in any real estate transaction, there exists a …….of risk. The secret is to mitigate as much of the risk by performing your own due diligence, obtaining the advice and/or recommendations of professionals, and putting together a practical and prudent strategy to safeguard your initial and ongoing financial obligations relating to the Lease Option. While Forms, Classes, Seminars and Books are available on the opportunities of Lease Option we suggest the following:
- Retain the services of a Realtor or Attorney who possess the skill set to negotiate and document your Lease Option agreement. Although varied from case to case, there exists a general standard of practice regarding these kinds of transactions.
- You may want to consider recording at least a “Memorandum of Lease” in the County where the property is located. This action at least puts a new lender on notice in the event the Seller/Landlord decides to further encumber the property the property to pull out cash. Think about it, at the time you plan to exercise your option, the loans may exceed the value of the property without this precaution.
- Obtain a Preliminary Title Report (PTR) or some sort of a “lot book guarantee” which will provide and/or confirm existing and encumbrances on the property including the status of the property taxes.
- Review the Record Trust Deed to read and understand provisions in the Mortgage of Trust Deed that which the Lender may have imposed restrictions to leasing of the property
- If a Condo or Townhouse, check out the HOA documents to be sure there is no prohibition against the owner leasing the property
- In the lease agreement pay special attention who is responsible for paying the Hazard Insurance, HOA Dues, Assessments and Property Taxes.
Benefits to the Landlord could be
- A ready prospective buyer willing and able to provide up front cash flow and to make or assist in paying the existing mortgage payment
- Pay all or part of the cost of ownership including taxes and insurance
- Take care of the maintenance and upkeep of the property
- Reduces the risk of owning a vacant property subject to vandalism and falling into disrepair.
The Note Servicing Company takes care of collecting the Lease Option payments for the Tenant and accurately recording payments as well as disbursing the payments to whoever directed. When and if, the Optionee assigns their rights to a third party in possession under a Lease or Lease Option Agreement, the Note Servicing Center has the capabilities to continue that process, and when instructed forward the excess funds to the original Optionee or wherever directed.
To sign up for Lease Option Forms click here and choose the appropriate Package. Everything is there you need. Just complete the forms online, download and send to the Note Servicing Center either by email attachment or via facsimile. You can pay the set-up fee on-line by check or credit card (click here – link to the page)
(Note: The Note Servicing Center cannot accept partial payments. Only full monthly payments are accepted. The Note Servicing Company is not a Property Management Company and does not provide Foreclosure Services, provide legal advice and cannot withhold or misrepresent information requested by your lender. We will gladly answer your questions as best we can about servicing and the benefits of using a third party servicer in a Lease Option transaction).
If you have additional questions, please feel free to ask in the area provided below. Please include your e-mail address. Thank you.