Don,

Thanks for clarifying -- you are correct! I do sandwich leases all the time and you are correct, it is the legal right to lease the property that is important and what I should have said.

Thu Jul 31 2008, 10:51

The descriptions below are essentially correct.

It's important to understand, as noted, that everything's negotiable: The amount of up-front option money (it can be as little as a dollar, or as much as you'd like--3%-5% of the value of the property), the amount of rent credited toward the purchase price (anywhere from 0% to 100%...10%-25% is the usual range)...the length of the option (it can be as short as you want, but as a practical matter if you want the tenant-buyer to purchase, it ought to be at least a year, and can be several years)...and the purchase price can be whatever the two of you agree to (though, if the tenant-buyer wants to refinance, the house will have to appraise for the purchase price).

There are various protections that should be included for both the buyer and seller. You've identified yourself as "Home Buyer." So you want to make sure that the lease and the option are in the same document, rather than two separate documents.

Although lease options (which are not "special leases"--they're a lease coupled with an option) should certainly be reviewed by an attorney, there is no requirement that they be written by an attorney. Similarly, there's no requirement that you find one, or negotiate one, using a Realtor. Many aren't.

There are a number of good sites out there on the subject. Here's one: http://www.lease2purchase.com/

Just a couple of clarifications and comments on some of the statements below (which, as I already said, are generally very good).

Wendy wrote: "you will want to make sure that the person that you are leasing the home from actually OWNS the property." Not necessarily. You will want to make sure the person you are lease-optioning the home from has the legal right to lease and option the property to you.

There's a technique that some investors use--completely legitimate, ethical, and legal--called a "sandwich" lease option. It works like this: The investor lease-options a property from an owner. Hypothetically, let's say the lease-option calls for payments of $1,300 a month and a purchase price of $250,000. The investor then turns around and offers the same property on a lease-option to a tenant-buyer for monthly payments of $1,600 a month and a purchase price of $260,000. The investor might also charge an up-front option fee. So, every month the investor makes $300 in positive cash flow from the unit. And if the tenant-buyer purchases, the investor makes another $10,000 (the difference between his price of $250,000 and the sales price of $260,000). The investor typically will assign his $250,000 option to the tenant-buyer for $10,000, so the T/Bs cost is $260,000.

The key there is to make sure that the investor really does have an assignable option, and that he/she has the authority to rent the unit to you.

To protect yourself, you'll need a number of documents. One should be an "Authorization to Release Information" signed by the owner. That allows you to contact the owner's lenders and confirm that the mortgage payments are being made on time. You don't want the owner to go into foreclosure; you'd then be out of luck.

You should also either file a notarized copy of the option or, better, a "Memorandum of Agreement," with the recorder of deeds in your city or county. That will "cloud the title" and hinder the seller from selling the property without your knowledge or authorization.

And you should have some provisions in the option providing for an extension of the option under certain conditions. And perhaps language providing for a readjustment of the purchase price under certain conditions (say, in a declining market, if the property won't appraise for the agreed-upon amount).

And, as John explains, the option fee is generally not refundable if you fail to purchase the property. The option fee is NOT a downpayment. It's NOT a deposit. It's a payment for the right to purchase the property. Often/usually, the option fee will be applied to the purchase price or downpayment if you do purchase. But if you don't, the money is gone.

Hope that helps.

Thu Jul 31 2008, 10:32

Yes! There are quite a few things you need to consider.

First and foremost, the state of the market had lead to a lot of fraud. If you aren't going through an agent or Lease Option company, you will want to make sure that the person that you are leasing the home from actually OWNS the property. I just wrote a Blog article this morning about a neighboor who leased optioned a vacant home to an unsuspecting family.

You also want to make sure that the home isn't in foreclosure and that the payments are current.

You will want to check values to make sure that the option price isn't more than the home will be worth at the end of your option term.

A Lease Option rather than Lease Purchase may make more sense, because you can, but are not obligated to buy the home.

How is your credit now? You need to consider this when you determine the term you will seek. For some people, 12 months isn't enough to repair their credit and qualify to buy the home.

You will want to begin repairing your credit right away.

If you can, find a program that will report your payments to the credit bureau.

You also want to find a program/seller that will offer some sort of rent credit that will be applied to the purchase price. This way, you can begin to build up equity.

Good Luck!

Thu Jul 31 2008, 09:59

Option scenario

Buyer pays the seller option money for the right to later purchase the property. This option money may be substantial or as little as $1.

Buyer and seller may agree to a purchase price now or the buyer may agree to pay market value at the time the option is exercised. It is negotiable. However, most buyers want to lock in the future purchase price upon inception of the option.

The term of the option agreement is negotiable, but the common length is generally from one year to three years.

Option money is rarely refundable.

Nobody else can buy the property during the option period.

The buyer can sell the option to somebody else.

If the buyer does not exercise the option and purchase the property at the end of the option, the option expires.

The buyer is not obligated to buy the property.

Lease Option
Buyer pays the seller option money for the right to later purchase the property. The lease option money may be substantial.

Buyer and seller may agree to a purchase price now or the buyer may agree to pay market value at the time the option is exercised. It is negotiable. However, most buyers want to lock in the future purchase price upon inception of the lease option.

During the term of the lease option, the buyer agrees to lease the property from the seller for a predetermined rental amount.

The term of the lease option agreement is negotiable, but the common length is generally from one year to three years.

The option money generally does not apply toward the down payment.

A portion of the monthly rental payment typically applies toward the purchase price.

Option money is rarely refundable.

Nobody else can buy the property during the lease option period.

The buyer generally cannot assign the lease option without seller approval.

If the buyer does not exercise the lease option and purchase the property at the end of the lease option, the option expires.

The buyer is not obligated to buy the property.

Lease Purchase
Buyer pays the seller option money for the right to later purchase the property. This option money may be substantial.

Buyer and seller agree on a purchase price, often at or a bit higher than market value.

During the term of the option, the buyer agrees to lease the property from the seller for a predetermined rental amount.

The term of the lease purchase agreement is negotiable, but the common length is generally from one year to three years, at which time the buyer applies for bank financing and pays the seller in full.

The option money generally does not apply toward the down payment.

A portion of the monthly lease payment typically applies toward the purchase price
.
Option money is nonrefundable.

Nobody else can buy the property unless the buyer defaults.

The buyer typically cannot assign the lease purchase agreement without seller approval.

Buyers are often responsible for maintaining the property and paying all expenses associated with its upkeep, including taxes and insurance.

The buyer is obligated to buy the property.

This is usually done when the owner can not sale the property.

John Reinhardt
RE/MAX Greater Atlanta
678.784.4440

Thu Jul 17 2008, 14:42

Hi Mrh,
Your REALTOR should be able to answer all of your questions and concerns regarding the contract for Lease Purchase.
Best of luck

Thu Jul 17 2008, 14:34