Read Dp2's comments. That's his specialty.
Otherwise, there's a lot of questionable material below.
STATEMENT: "not really recommended due to the fact that you have to put up Option Money that is non-refundable should you choose to NOT exercise your option to purchase."
CORRECTION: I'm not sure who says they're "not really recommended," except for the person making the statement and a few others below. It's true that the option fee generally is not refundable--though even that's negotiable. But remember: The option fee is paid to "purchase" the option--to give the tenant-buyer the right to buy. If the TB chooses not to buy, he/she still has had that right.
STATEMENT: "The issue can be that you & the owner state today that you have the option to buy the house for $300K, then 1yr from now the house won't appraise for $300K, it appraises for even $290K, the owner CAN say, "our agreement was for $300K, I'm not going to sell, I'm just going to keep you option money"."
CORRECTION: That one's true. So that's why your option agreement takes that contingency into consideration. It could state that, in the event the appraisal is low, that the option is extended for another x number of years. Or it could state that the sales price will be reduced to the appraisal amount. Or it could state that, in that event, the option fee is refunded. A low appraisal doesn't have to be a problem if the option agreement provides a method for dealing with it up front.
And here's another point: The tenant-buyer just saved $10,000 (minus any option fee) by NOT buying up front. Say he/she bought at $300,000 and a year later the property's only worth $290,000. And let's say the tenant-buyer paid a $2,000 option fee. Well, which would you choose: A $2,000 loss or a $10,000 loss? Neither is enjoyable, but the answer's a no-brainer.
STATEMENT: "put a clause in your lease agreement that simply states "Tenant has FIRST RIGHT OF REFUSAL" should the owner wish to sell the property anytime during the lease term". "
CORRECTION: You could do that. But why not do it the better way and construct a lease-option? The owner has as much right to request a fee for that concession in a lease as for an option fee in a lease-option. Further, in a lease-option typically (though it's all negotiable) a portion of the rent is credited to the purchase price. Under a first right of refusal, there's no such provision--no such benefit to the tenant-buyer.
STATEMENT: "ask for the "right of first refusal"...which means the landlord will come to you first, before selling to someone else. The sale price will be negotiated at that time. That, in my opinion, is the best way to go."
CORRECTION: That is one way to go. However, a lot of tenant-buyers entering into lease-options want to know what the price will be. They don't want it open-ended; they have no ideal whether they'll be able to afford the property. They want to lock in a secure price, one they know (or think they know) they'll be able to handle in a few years.
STATEMENT: "in my opinion in this declining market here in AZ favor the seller."
CORRECTION: They actually favor the buyer. Lease-options give tenant-buyers the RIGHT but not the OBLIGATION to purchase. If prices decline, the buyer always has the option of walking away at the end of the lease. However, if it makes financial sense, the buyer exercises the option and the owner has the OBLIGATION to sell the property. Another comment below says, "consulting an attorney is never a bad thing." True, but listening to them isn't always a good thing. When I went to one attorney to have my lease-option paperwork reviewed, he said he didn't like lease-options. Why not? Precisely because they were unilateral agreements: They bound the owner to selling (if requested), but did not bind the tenant-buyer to buying. Well, duh. That's precisely the point. Still, I agree with Dp2: " I strongly recommend that one consult with a real-estate attorney who has experience structuring these kinds of deals." And that's the key--an attorney with experience in structuring such deals.
Lease-options and lease-purchases still exist, and they can be a great solution for some when structured properly. There's no need to request a "first right of refusal" for a properly structured (and recorded) option. An option already gives the optionee (or option holder) equitable interest in a property. (Please consult with a real-estate attorney for a more detailed explanation of equitable interest doctrine, and how that applies for an option.)
Some people erroneously malign lease-options (and other forms of creative financing) based upon the negative experiences of a few individuals. Creative financing is another tool; it's basically another form of financing. Just as one wouldn't condemn all conventional loans based on some bad testimonies, one also shouldn't condemn all deals with creative financing similarly.
One needs to make sure that one fully understands what's all involved before entering such an arrangement. I strongly recommend that one consult with a real-estate attorney who has experience structuring these kinds of deals. I also strongly recommend that one close these kinds of deals using an escrow company. Most--if not all--of the bad testimonies share the common flaw: the tenant/buyer didn't consult with a real-estate attorney, and didn't close the deal using an escrow company.
I invest in OC, and I use creative financing from time to time on deals. Most of what I know about equitable interest doctrine, I learned from some attorneys who practice in CA (and some other states). Wendy Patton, an investor and Realtor, teaches (and wrote a book) on how to properly structure these kinds of arrangements. You might want to check that out too.
Hope that helps,
It's more than real estate. It's RAYL-Estate!
Brian Rayl, REALTORÂ®, e-PRO, SFR
Keller Williams Elite - Dallas, TX
The flaw is the assumption that the option consideration is ALWAYS non-refundable--yet, that's not true. A tenant/buyer can negotiate that the option fee or a portion of it is refundable when working with a seller to set this up. I (and some other buyers) have also negotiated options with $0 for the option consideration with sellers, in exchange for giving them the right to continue marketing their property and go with a better offer.
The point here isn't to split hairs; rather, it's to ensure that we're all disseminating the correct info.
In my opinion, means there might be other opinions, and the view expressed is just that person's thought on the subject, neither right nor wrong.......nor the end-all answer to the question.
I stand behind MY OPINION that agreeing to a set purchase price a year in advance in this volatile market is not what I would recommend when the option money would be foreited if the option isn't exercised.
I, of course, would also strongly recommend that anyone speak with a real estate attorney to discuss it in detail, to fully understand it , and to structure it....in northern NJ we use attorneys for our closings, so that would be a part of the process already.
When buyers have brought up the subject of "lease options" , many of the buyers I spoke to had no idea that it usually involved non-refundable option money - that they were paying for that option...........once that was explained, they didn't want to go that route.
Many consumers (those I spoke to) also erroneously thought, or assumed, that all their rent paid would be applied to the purchase price.......as I stated, there are a number of misconceptions (based on my exprience) on the consumer's side regarding lease options.....these need to be clarified before anyone embarks on that avenue.
Most people don't really understand what a lease with option to buy means.....specifically, that it means non refundable money will be given upfront, and, more importantly, a sale price will be decided upfront, too.
I don't think this is a good idea.
If you want the option to POSSIBLY buy the home.....and you need a down payment, then simply put money aside each month, as the lease progresses.
Sometimes, the tenant will pay a amount over the fair market rent, and that overage will then be credited towards the sale price if the tenant does buy the home...........however, if they don't exercise their option to buy the home, the additional money is usually forfeited.
In this volatile market - why would anyone want to decide a sale price a year in advance?
As mentioned below - ask for the "right of first refusal"...which means the landlord will come to you first, before selling to someone else. The sale price will be negotiated at that time.
That, in my opinion, is the best way to go
Prudential NJ Properties
downfall is the price could go down,
you may change your mind about
buying this home and you would lose the deposit which is non refundable.
The upside is the home could go up
in price and you would get a good
deal. What other questions do you
have about it? Ingrid ski realtor.
you Lori for your inquiry
Lease options are an option, but not really recommended due to the fact that you have to put up Option Money that is non-refundable should you choose to NOT exercise your option to purchase. The issue can be that you & the owner state today that you have the option to buy the house for $300K, then 1yr from now the house won't appraise for $300K, it appraises for even $290K, the owner CAN say, "our agreement was for $300K, I'm not going to sell, I'm just going to keep you option money".
What you should do, if you're not quite ready to buy yet, is get into a lease, and put a clause in your lease agreement that simply states "Tenant has FIRST RIGHT OF REFUSAL" should the owner wish to sell the property anytime during the lease term". This means you get first dibs & you didn't lose any option money.
Realtor Since 1996
Here's the link to a recent one: