Lease option to buy a home can present interesting alternatives and opportunities for buyers and sellers, especially during challenging economic times.
Lease options will work differently in other states, depending upon real estate laws. This is a general outline of how lease options would work in California.
- Buyer pays the seller option money (consideration) for the right to later purchase the property at a certain price.
- Lease option contract must be in writing to be enforceable.
- The lease option is a separate contract from that of the proposed home purchase contract, and the California Association of Realtors publishes the two different forms for use in this state.
- Amount of money (consideration) for lease option is negotiable.
- Buyer and seller should agree to purchase price at the time of signing. Otherwise that term can lead to misunderstanding and disputes. Most buyers want to lock in the price.
- Otherwise, the buyer may agree to pay market value at the time the option is exercised, and it must be agreed in advance how that price is determined.
- Proposed buyer would agree to lease the property from the seller for a predetermined rental amount, and rent payment would be separate from money paid for the purchase option.
- Time term on lease option agreement is negotiable and must be specific as to when buyer must exercise the option.
- Option money (consideration) generally does not apply toward the down payment on purchase contract.
- However, some people agree that a portion of monthly rental payment would be applied toward the purchase price.
- Option money (consideration) is not refundable unless the lease option contract states it clearly.
Lease option Advantages for buyers:
- No one else can buy the property during the lease option period.
- Proposed Buyers can lock in terms of purchase contract now when they don’t yet have needed down payment.
- Buyers can get a home under lease option contract when their credit record isn’t good enough to get a home loan.
- The Buyer is not obligated to buy the property. However, if he or she does not excercise the option and buy according to contract, he would forfeit consideration already paid for the option.
Lease Option Advantages for sellers:
- Sellers get to move the home toward sale in this down market.
- The buyer generally cannot assign the lease option to another person without seller approval.
- If the buyer does not exercise the lease option and purchase the property at the end of term on the option, that option expires, and seller could move on and sell to somebody else.
- Sellers would in that situation keep the option consideration already paid.
- Sellers can sometimes get higher and better price from under lease option contract as compared with straight sale.
- Property cash flows can possibly be better for sellers.
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This is for information only and not the providing of legal services or that of a professional accountant. Every situation on proposed lease option contract is different. Owners and prospective buyers on option contracts consult with a qualified real estate attorney in that state and area and get correct information for their individual situation according to law.
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Harrison K. Long, REALTOR® & broker, Explore Group, Coldwell Banker Previews, Irvine, CA. CA DRE #01410855. ExploreProperties@gmail.com. National Association of Realtors, California Association of Realtors, and Orange County Association of Realtors. attorney member of the California State Bar Association #69137
Newport Beach and Irvine CA area REALTOR®, broker agent and property information source a Coast Living Homes.
