Lease Option - Purchase agreement needed??

Question

Hey guys,

I have gotten mixed reviews on this, so I would like to see BP's thoughts on it. On a lease option, I will have my lease and a separate contract that will give the TB the option to purchase and also disclose the non refundable option fee. Should the details of the purchase go on this form as well or should I have a purchase agreement as well? If I have three separate contracts, how do you go about dating the purchase agreement?

Also, I truly want the TB to actuall purchase the property in the end and would like to set them up to succeed. Can I put in one of those contracts that the TB must work with a mortgage broker or some kind of financial financial advisor to help guide them on a monthly basis to achieving the required credit score to qualify?

Account Closed · Answer

If I were the landlord/optionor personally I would not execute a purchase and sale agreement at the time of signing the lease/option.  Once you and the tenant/buyer have signed a real estate contract, they have equitable title, and in my view that would  elevate the status of what is intended as merely an option.  In my option form, in bold print, the option is NOT contingent upon the tenant/optionee's ability to obtain financing, a term that is typical in a real estate contract.  Further, I want there to be no doubt that the consideration is NOT anything like earnest money, or have anything to do with a real estate contract.  It goes on to say "this agreement is not an installment land contract, contract for deed, or equitable mortgage, but simply the optionee's right to purchase at the above referenced price".  If you attach the real estate contract to the option and the lease, would there be any confusion?  And if so, what would a court have to say about it?  Personally, I would discuss this with a knowledgeable real estate attorney before I did that.

Think about it, you don't have to tie up all the loose ends so to speak.  When the option nears expiration the optionee can exercise the option by producing the cash.  Or, at that time, you can make a different arrangement with him so that he can go try to get a loan.

Now, just because I would not execute the real estate contract as a landlord/optionor, I might well be tempted to include it with my option agreement.  My lease and option by the way as  a buyer are one contract, not two, and are constructed differently.

Either way, the option gives the optionee a right, and that is, to exercise an option and produce the cash.  In my option they have to notify me 60 days ahead of exercise.  And I suspect that if I, or perhaps the seller if I were the buyer, could be successfully sued if they refused to honor the agreement.  You really didn't need a purchase contract to accomplish that.

As far as the purchase goes, my option agreement mentions the terms (cash), and that there will be no prorations, and that the agreement is not contingent upon financing.  I've only had one tenant ever exercise on his own.  We never did have a formal real estate contract.  The tenant got his loan and closed with just the option agreement and of course I provided the payoff figure.  Any other tenant who exercised I involved myself at the time, helped them to get financing, etc etc.  Otherwise, it would not have happened.

As a buyer, I mostly would not use a lease/option.  If I were going to do this type of transaction I would rather do a subject to transaction as a buyer.  I have done a few deals as a tenant/buyer, but my preference is otherwise.

Michael Baradell · Answer

@Matt Skinner Wow!! Good luck on that for sure. So you used a LO to purchase this property as your primary residence?

Wayne Brooks · Answer

You date it when you sign.  It will reference the option agreement.

Michael Baradell · Answer

@Wayne Brooks that is what I was thinking as well. How do you suggest dating the purchase agreement so that it will remain valid for the duration of the lease term?

Wayne Brooks · Answer

Yes, you should have a purchase agreement which will define the method, terms, conditions, etc of the purchase.  The purchase agreement will reference the option agreement, and visa versa.