Lease purchase option?

Question

Hi. We currently put our home up for sale. A couple wants to purchase it, but asked if we would consider a lease option while they attempt to sell their current house. We are open to doing that, but what percentage down payment should we ask for in order to protect us? And, would the monthly payment go toward the purchase of the house?

John Santero · Answer

I do alot of these transactions and what the guys are saying above is correct.

I use a Option for Deed - a $5K non-refundable payment for the option to purchase your home for a set price at a set date. If they pull the trigger- the option money can be used as a deposit.

Someone also mentioned about a lease - it should match the dates of the option for a fair market rent. My rent does not go toward the down payment- do not confuse the two...

good luck.

Neil Aggarwal · Answer

I think you should write a lease for a given monthly amount.

Then, when they are ready to buy, put together a sales contract and terminate the lease.

It is two separate transactions. No part of the lease is applied to the sale or down payment.

Account Closed · Answer

@Stephanie Barcia I am not an attorney nor should you use anything following as legal advice.

The way this was explained to me by an attorney is that the lease and the option can be treated as two separate contracts. Why is this important? Well, if you sign a 1 year lease, with the right to exercise the option at the end of the year, and you have to evict the tenant, you still have to be able to honor the option.

Though it is unlikely that a tenant would be evicted, then be able to purchase, who knows. Six months after purchase, then an eviction, then having to figure out what to do with the property for the next 6 months until the option expires is something to consider. I would be careful about how you craft the agreement and would run it by an attorney before using it. What if the potential tenants are unable to sell their house?

If you are still sold on the idea, I would say a down payment of $5,000 - NONE of the monthly rent applied, the $5,000 would apply towards purchase, however if the tenants are unable to exercise the option, then you would be entitled to keep the down payment. I would not use the term "deposit", I am not even sure I would use "down payment", I would ask an attorney about proper verbiage for that sum.

Stephanie Barcia · Answer

Thank you all. This has been very helpful.

Brian Gibbons · Answer

1. market rent plus one months security

2. 3% option non refundable if not exercised, applied toward purchase price is traditionally done

3. sell at comps

4. Send tenant buyer to MLO to get preapproved for mortgage before they move in

5. 6 mo term should be enough but possible extension for 3 months might be wise

6. No rent credited toward purchase price

7. I like a rent discount if paid by the first, otherwise standard rent, can be modest like $50

8. Tenant responsible for down payment

Jesse T. · Answer

I agree on no part of the monthly payments being applied to the purchase price.  Give them the option to purchase at a set price, does have some value.  If the value of the option is not sufficient, a security deposit(which would be refundable if the option is exercised or declined) can be added to it.

It isn't a good situation to have a renter in your property without any incentive to return it to you in a good condition.

Jesse T. · Answer

I would write a short lease in the lease/option - 6 months should be  more than enough time for them to prep their house for sale, market the  house and close - so they can complete the sale.  The short period also makes the value of the option lower.

If your agent does not have experience with lease/option arrangements - I would consult with the broker or a lawyer who does have experience.  Option pricing will be one area where you want some local advice.

The rental rate should be in line with market rents and not applied to the purchase price.

If it is negotiated that the option is applied as a sellers credit it should be applied towards the closing costs vs. a credit toward the price.

Make sure the couple can qualify for the mortgage once their house is sold.  Also it may be worth having an appraisal done of the property to make sure that is not likely to be an issue when the property sells.  I also would recommend a credit/background check of the couple as part of the process.  For the short-term they will be your tenants - so you want to make sure they would qualify to rent your property.

Lease purchase option?

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