Questions about Lease Options
Hi BiggerPockets family,
I have a couple of questions regarding Lease Options:
1. What are rent credits? And what are they used for and considered for?
2. How to determine how many years to do a Lease Option for? What is the criteria and what is the most common used time frame?
3. Option Deposit Flat Fee vs 3% of the house price. What is the difference, and is there a problem legally if I simply choose to do a flat fee?
Thank you.
I am by no means an expert, but here is my 2 cents.
1) Rent credit will do nothing but make it harder to remove someone from the property if things go bad. It's my understanding that the tenant buyer can so equity/interest in the property and that is never a good thing. Do not offer rent credit. You offer the them the chance to add to the non-refundable option deposit if they wish.
2) Option can be any length, mostly 2 years or less. Lease is one year at a time with renewals. Never mention the Lease in the option agreement or the option agreement in the lease.
3) Get as much money as possible for the option fee. Don't mention it as a down payment, but do offer to credit at close if they exercise the option within the agreed upon timeframe outlined in the option agreement. Do not give them a copy of the option agreement, do not file it at the courthouse.
Again the above is my 2 cents from lessons learned the hard way. There are others on BP that know way, way more than I.
Hey Todd,
Thank you for your reply. I really appreciate, your lessons learned the hard way is exactly the type of advice that I am looking for. You have opened the Pandora's box cause now more questions arrived that I didn't have before. Here are the questions that I have:
1.1 When you say don't offer rent credit, what do exactly mean by that? Offer it to the seller or the tenant buyer? (Sorry, I am complete noob).
1.2 How much do they add besides the non-refundable deposit? Is it optional or do they have to do it? What happens if they don't do it?
2.1 How much is the renewal fee if they decide to renew?
2.2 Why you should never mention the Lease in the option agreement or the option agreement in the lease.
3.1 To who should I not give them a copy of the option agreement?
3.3 Why should I not file it at the courthouse?
Thank you.
Hey Hugo,
Here are my "don't take this for gospel" answers.
1.1 Don't offer rent credits to the tenant buyer. The seller will be happy with getting their payment covered for the most part, if not work a deal with them.
1.2 They can add anything to the non refundable deposit, just make sure they know it is for option consideration and they lose it if they walk. Also, make sure it is spelled out that any option consideration MAY be credited to the sale price but is in no way a down payment. The only way I would even bring this up is if they were short on what you want as an option deposit. ie... you wanted 15k but they only 12K but will make you whole when they get their tax refund back in a week.
2.1 The renewal deposit is whatever you both agree on. If they miss the option window due to something beyond their control( scores didn't come up as fast as they thought they might, interest rate rose and made their backend ratio too high) and these things can be handled in 6 months or so I wouldn't change them a renewal. If on the other hand they haven't done anything to help their cause and maybe even hurt their chances to cash out, I would think about a big renew fee and/or not renew their lease. This is a judgement call for you to make. At the end of the day your goal is to make sure they get the home if they want it.
2.2 If you cross mention the documents, a Judge will be confused and could treat the non-performing tenant buyer as a tenant only and make you evict them. Or the Judge could treat them as having ownership in the property and then you would have to foreclose on them, and depending on the state you might have to deal with a redemption period, up to one year after the foreclosure where the prop is in a holding pattern. That is except for taxes, which you will be responsible for. It is easier to deal with an eviction, so I advise to remove all doubt.
3.1 Don't give the tenant buyer a copy of the Option agreement
3.3 If you file the option at the courthouse(the one between you and the tenant buyer) it will cloud the title. If things don't work out, you might have to give the tenant buyer some money to release the cloud, if you can find them. They have you over a barrel at this point and could ask for all of the non refundable deposit, plus some. This is also the reason I don't give them a copy of the option agreement, they can record it if they wish. Now, if you are doing a lease option with the seller, they you want the lease and the option to be the same form and you want to record it. This will keep the seller from taking a mortgage out on the property without your knowledge.
Take the above for what it's worth, I'm not an attorney and make claim that the above is 100% factual. That said I've been in the real estate/mortgage industry for a bit.
Holla if you have more questions
Hey Todd,
Thank you so much for answering all the questions that I've had so far. I truly appreciate it.
If any more questions pop up, I will definitely let you know.
Have a great day!