How to draft a lease to purchase option on our new home?

Question

If my wife and I decide to move into our next property to fix up and force equity, how safe would we be to put money into improving the property?  How secure are purchase option deals?  Is there an out for the home owner to sell or bac out of our pending purchase?   How would you or have you drafted this deal before.

Bill Gulley · Answer

The only way you should ever work on a property you don't own is with a contractor's agreement and be legal so that you can file liens for non-payment. Tenants making repairs gets into IRS tax violations with depreciation requirements, residential tenants can not make capital improvements.

A lease also is not conveying the rights of ownership required to contract with others or pull  permits required.

Leases can be terminated, bankruptcy, foreclosure, estate matters, law suits, or if an owner must move back into a property as their principal residence, can have a lease terminated.

Review the concept of the "Bundle of Sticks" ownership rights and what a lease conveys, it is only the right of possession, not all rights.

An option can also be broken, consideration may not be sufficient, it may be drafted improperly or illegally. Generally, in RE law, an owner is favored over a buyer.

A lease and an option need to be separate contracts, not tied together. An option may not make any requirement for the optionee (buyer) to perform in anything, otherwise it may be construed as a sale contract. Read the related topics in the lease-option forums here.

If you want to do house hacking, you need to own the property! Good luck :)

Wayne Brooks · Answer

Have a professional deraft/review it.  Even with a solid contract, there will be risk.....seller just changes their mind and you have to sue, he gets some type of judgment/lien, some other title issue, etc.  I would Not put any improvements into something until title was in your name.