The Ins and Outs of Your Lease Option Contract

The Ins and Outs of Your Lease Option Contract

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A lease option contract contains many of the basic terms a normal renter’s lease would, with additional clauses specific for the purchasing process. This helps to clarify the relationship the landlord and tenant/buyer have during the rental period, along with the terms and conditions of the sale should the tenant/buyer exercise their purchase option. Knowing what to look for and how to read into your lease-option contract can make all the difference in spotting unfavorable terms and conditions that may cause you heartache and financial woe in the long term. While the structure of the contract and ordering of clauses may vary, here are some basic components you should understand and take note of when reading your lease. Many of these items may be included in a purchase option section, or used to modify terms that would normally be associated with renting. And of course, if you have any questions or concerns whatsoever involving your lease-option contract you should never hesitate to consult your real estate lawyer.

  1. Purchase option. Included in your lease-option agreement will be the terms of sale if the option is exercised. This includes everything from the final sale price, option fee, closing date, (used for the down payment), and terms of sale.
  2. Lease term. The duration of the rental period will be noted on the contract, as well as available options at the end of the lease. This clause differs from similar items a renter’s lease in that they can also spell out proceedings if the purchase option is not executed, regarding if the lease can be extended or how it is terminated.
  3. Rent and rent terms. Like a renter’s lease, this section will list monthly rent, the date and method of payment, and any late fees that may be allowed. Tenant/buyers should make note of rent terms that could invalidate the purchase option agreement for late rent payments.
  4. Personal property. If appliances or furniture are included in the lease, there may be a clause addressing which items are included in the final sale. Unclear terms for what personal property is included in the sale can lead to headaches and/or civil court down the line.
  5. Maintenance, repairs, alterations. For both buyers and sellers, allowing the tenant to do minor repairs and alterations can be a great benefit. The lease will establish who is responsible for major repairs, such as roof or furnace repair, during the lease term if this is part of the agreement. The lease should also establish what type of modifications to the property can be made, and the process by which the landlord approves such changes.
  6. Deposit funds. All deposits put towards the final purchase of the home should be noted and accounted for in the lease agreement. Additionally, if money is being accumulated towards a down payment on a monthly basis, this should be included in the contract.
  7. Default. A clause detailing the terms for default on rent payment will likely be included on your lease. Can specify that upon default of rent payment, the rights to sale and/or any rent credit or deposit are terminated as well.
  8. Examination of title. The lease agreement may include terms that set timeframes for the tenant/buyer to examine the title on the home before finalizing the sale. This may also include a time frame for the seller to get any exceptions the seller may find removed, and a clause allowing the tenant/buyer to terminate the agreement if they can’t be resolved.
  9. Utilities and taxes. Most rental leases spell out clearly who is responsible for utilities, and lease-option contracts are no different. Additionally, your lease should include language addressing who is responsible for property taxes.
  10. Closing and closing costs. Your lease may also include a notice on closing costs, which will be paid by the tenant/buyer should he/she decide to purchase the home. Closing costs include everything from inspection fees and title insurance to up front fees for recurring costs, such as loan interest and prorated property taxes.
  11. Assignable/Non-assignable. Your lease agreement can also include a clause spelling out the terms under which you may transfer the agreement to another individual. In many cases, the lease will require landlord consent to sell the lease-option to another buyer.
  12. Finance clause. A clause of this variety states in writing that the tenant/buyer is responsible for securing financing in order to complete the sale, acknowledging this is unpredictable. Putting this in writing absolves the seller of responsibility for the sale if the tenant/buyer cannot secure financing in time to buy the home.

In addition to your lease-option contract, you may need additional documents to cover ground not included in the lease. This shortlist of documents provide buyers with additional protection from scammers, or are standard requirements for a home sale doctored specifically for a Rent-to-Own sale:

    1. Lead based paint disclosure. State and local laws have different protocols for lead based paint. You may need a disclosure for houses built before a certain date.
    2. Notice of option agreement. Some realtors and investors recommend drawing up a form that states clearly the terms of the purchase option to give to a local courthouse. This can be recorded in the land records on the property, and protects the property from being sold elsewhere by “clouding” the title.
    3. Affidavit of liens. This simple form states that the seller does not have any liens against the property (it should be notarized, too).
    4. Authorization of release. This document allows you to verify your landlord’s mortgage information, ensuring the balance amount he/she says is accurate. This is important for making sure your landlord doesn’t owe $250,000 on a property you’re budgeting $200,000 for.
    5. Due on sale disclosure. A due on sale clause is a clause in a loan or promissory note that says the full balance may be called due upon the transfer of the property. This disclosure gets in writing an acknowledgement from the seller that this may be a clause in their loan.
    6. Lease-option consultation agreement. If you are purchasing the house as an investment and plan to sell it, drawing up an agreement that states the relationship between the seller and intermediary. Essentially, this says that the seller is not entitled to any profit made in the sale of the property by the investor to a tenant/buyer.
    7. Property disclosure/disclaimer. Before purchasing the property, a form listing any defects or issues with the property is drawn up by the seller. Protocols may vary from state to state as to what is required for this form.

 

 

 

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Jonathan is a CSULB graduate with expertise in wielding the art of the written word. He has been writing professionally for many years in copywriting, content editing, branding, and journalism. Everyone has a story to tell, and Jonathan is able to bring it to life.