What Exactly is a Lease Option?
September 27, 2007
Recently I have noticed that Sellers have been offering "lease-option" opportunities in their "for sale" advertising. It has been a while since the real estate environment has used a "lease-option " as a method to "sell" a home.
Back in the 1990s, when properties were not selling and sellers were leaving the area, and rental properties were scarce, buyers began writing "lease-options" on properties that were listed for sale. The main drawback of a "lease-option contract is that if the value of the property drops, the lessee will not exercise the option and if the value of the property increases, the lessor(seller) will lose any increased value.
So what exactly is a "lease-option"?
It is not a contract but rather consists of 3 separate agreements or contracts which are tied together. A breach of one of the 3 contracts will void all 3.
#1 is an option to purchase. This agreement sets the amount of money the optionee will pay the optionor for the right to purchase the house at some later specified date, usually in one year. It will specify how and when the option must be exercised.
#2 is a purchase agreement. It will specify the purchase price, the earnest money deposit to be made, the length of the escrow period if the option is exercised, any contingency, the loan amount, the escrow holder, the title company and any other conditions that buyer and seller might negotiate.
#3 is a lease agreement. It will specify all the terms of the lease. How much security deposit, the monthly rent, when and where the rent is to be paid and the length of the lease.
Sometimes a "lease-option" is referred to as a "lease-purchase". These agreements differ in a significant manner. The "lease-option gives the lessee the choice to purchase the property at the agreed price and terms at a later date. The "lease-purchase" obligates the lessee to purchase at the agreed price and terms within the specified time.
If you are planning to enter into either type of agreement, you might want to seek legal advice.
Recently I have noticed that Sellers have been offering "lease-option" opportunities in their "for sale" advertising. It has been a while since the real estate environment has used a "lease-option " as a method to "sell" a home.
Back in the 1990s, when properties were not selling and sellers were leaving the area, and rental properties were scarce, buyers began writing "lease-options" on properties that were listed for sale. The main drawback of a "lease-option contract is that if the value of the property drops, the lessee will not exercise the option and if the value of the property increases, the lessor(seller) will lose any increased value.
So what exactly is a "lease-option"?
It is not a contract but rather consists of 3 separate agreements or contracts which are tied together. A breach of one of the 3 contracts will void all 3.
#1 is an option to purchase. This agreement sets the amount of money the optionee will pay the optionor for the right to purchase the house at some later specified date, usually in one year. It will specify how and when the option must be exercised.
#2 is a purchase agreement. It will specify the purchase price, the earnest money deposit to be made, the length of the escrow period if the option is exercised, any contingency, the loan amount, the escrow holder, the title company and any other conditions that buyer and seller might negotiate.
#3 is a lease agreement. It will specify all the terms of the lease. How much security deposit, the monthly rent, when and where the rent is to be paid and the length of the lease.
Sometimes a "lease-option" is referred to as a "lease-purchase". These agreements differ in a significant manner. The "lease-option gives the lessee the choice to purchase the property at the agreed price and terms at a later date. The "lease-purchase" obligates the lessee to purchase at the agreed price and terms within the specified time.
If you are planning to enter into either type of agreement, you might want to seek legal advice.
posted by shirley harry at 8:48 AM
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