|Buyer Looks for Lease Option||| Print ||
|Thursday, 29 November 2012 13:15|
By Phil Hunt
Special to the Times
Q: I want to offer a seller a lease option to buy versus a lease purchase. I would agree to rent for a period of time with a portion of my rent going to the purchase. There could be some option money as well. At some point, I would make my move to buy. Here is the problem: I want the seller to commit to a sales price now while prices are going up. Would a seller agree to that? How could I structure this?
A: Of all the ways to buy a property, a lease option is probably the least desirable of all for both buyer and seller.
You have identified one of the problems for the seller: What happens if the price goes up during the option period? And here are some problems for the buyer to ask themselves: What if I don’t qualify for a loan? What if I don’t like the house? What if my circumstances change and I have to move to some other location?
Most people do not understand how an option works. There are three documents which make up the lease-option: 1) the option agreement, wherein all of the terms of the option to purchase are disclosed and agreed to by both parties; 2) the lease agreement, wherein the parties agree to a term lease; and 3) a purchase agreement for the property with all of the terms of a sale, including PRICE, are disclosed.
It is literally a purchase agreement with a long close date, like 12 to 24 months.
All three documents are referenced to the other and all three documents make up the option to purchase. There is a non-refundable deposit from the buyer to the seller for the right to purchase within a specified window of time in the future.
Another problem for the buyer is: what if the price goes down during the option period? Well, you lose; you must buy the property or lose the deposit and all of the credit you have earned (a portion of the rent payments which were set aside to go toward your purchase price).
What if the seller does not make the mortgage payments and the property goes into foreclosure? It is a gamble, but all of real estate is a gamble.
Everyone is at the mercy of the whims of the market and the economy. A seller runs as many risks as the buyer.
Here are some other things to consider: 1) During the option period, the seller can not sell to any other buyer, no matter what; 2) What if the buyers are not keeping up the property? 3) What if the buyers do not make their lease payments? 4) What if the buyers move out and the property is not being maintained or paid for? 5) What if the market heats up during the option period and the seller really needs to sell to take advantage of the hot market?
The only way a lease-option works well is if nothing changes during the option period. The chances of that are between zero and none. The only thing we can count on for sure is change; nothing stays the same for long.
A better way to go for both parties is a lease with a first right of refusal. Here is where a would-be buyer leases the property for say 24 months with a “first right of refusal to buy.” This means that if the seller decides to sell the property and a buyer comes in with an offer, the seller has to offer the property to the tenant for the same price and terms as the third-party buyer.
This way, there is NO non-refundable deposit up front and the buyer can take the property at market value, not at a locked-in price, which may not be good later.
It can be agreed that, if the tenant buys the property, a portion of the rent goes as credit for the purchase. Like all real estate transactions, it has its down sides — but it’s a much better deal for both parties as compared to a lease-option.
Also, in your question, you stated “lease purchase versus lease option.” I think that is a distinction without a difference. Thanks and good luck.
Phil Hunt is a real estate broker in Castro Valley. Fax questions to 583-5480.