Lease-Options Are Back!

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A lease-option is utilized when a potential buyer wants to lease or rent the property with an option to buy it at a later date. The potential buyer pays separate consideration for the option to purchase at a later date to remain open for a specified period of time. If the potential buyer does not exercise the option, or does not pur­chase the property within the option time period, then the potential seller keeps the option consideration and retains the property. Generally, lease-options are done in a slower real estate market where the seller cannot simply sell the property outright. In this situation, a buyer, who may not have enough money for a down payment, can lease the property while they accumulate the money for a down payment. Often a portion of the monthly payment by the potential buyer will go toward the down payment. The option agreement must desig­nate a price or state the price that will be determined by some Objective stan­dard when the option is exercised. Because the parties have entered into a binding agreement, the potential buyer may sue for specific perfor­mance on the option, requiring the potential seller to sell the property to the potential buyer under the terms of the agreement. The agreement must, therefore, contain all “material” terms for a purchase and sale to proceed. Before proceeding with the lease­ option, the potential buyer should consider:   • Documenting the need for repairs with a property inspector. • Checking for liens recorded against the property. • Ensuring payment of the mortgage and taxes during the lease. Also, negotiating payment of insurance on the property.  • Ensuring that potential buyer will have the funds to make the down pay­ment and qualify for any loan needed at the time of exercise of the option. • Negotiating what will happen if the option period ends and potential buyer has not exercised the option. • Speaking with an attorney regarding removal of contingencies, disclo­sures, property inspections, etc.    After the lease-option is agreed upon, the option should be recorded to retain the potential buyer’s rights to the option.   As the REALTOR® on the transaction, compensation is negotiable. Typically, the broker is paid a commission on a portion of the rent, like a leasing agent, and upon the sale, assuming it closes. The leasing commission is often charged to the landlord but this can vary; however, the landlord usually pays the commission on the sale.

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