There should be TWO documents/contracts. The first is the option and the price you will pay to exercise an option to buy at a specific price and term. The second is the lease and lease terms.
another way of accomplishing a similar method of acquiring a home is the PURCHASE/lease. This is a committment to purchase, with a purchase and sale agreement, and all necessary steps and documents to make that purchase, with a delayed close. A second document is the early occupancy lease. I have used this method when the buyer WANTS to buy the home, but is waiting for their house to sell, credit scores to improve or some other event. (one was waiting till a boat sold).
Both are viable, Both require TWO contracts/documents that refer to one another.
Both require some kind of money exchange. The price for the option along with the lease deposit (two separate money events), or in the case of the purchase lease, Earnest money on the purchase, and any lease terms negotiated.
Gloria Gomez Matthews
Jensen White Real Estate
For example, you & seller agree to a price of $100,000 today (however, most lease/options set price in the future), $1,000/monthly rent, and that price will be reduced by 50% of the rent amount over the life of the option (great negotiation by the buyer to achieve this, this as example is fantasy). So, when you choose to exercise the option 12 months later, at that point in time you write a purchase contract at $94,000 which calculates to consider the rent credit ($100,000 less $6,000, or $94,000). But you will STILL BE required to have a downpayment by any lender, call it 20% of $94,000. Keep in mind the rents you have paid to the seller are spent...regardless of receipts for payment...there is no money that is 'liquid'.
Be VERY careful in separating 'rent monies' from 'credit monies'. You are very best to establish a market rent for the property (fair market rent ), and any monies above that rent you afford are ACCRUED in escrow and not spent. For example, your rent is $1,000 and you choose to afford $1,500 such that over 12 months you have paid $18,000 total, of which $12,000 is in rent which is now passed onto the seller who pays their lender, and $6,000 is sitting in escrow awaiting the day you make purchase intent (date of exercise). Your lender will view the $6,000 as downpayment monies (since it is 'liquid'), as well your option price will be considered as part payment also, call it $500. If you choose to abandon the deal, you get your $6,000 back (which is protected in escrow), but you lose the option monies ($500, keep as low as possible).
I hope this helps....I have experienced lease options, made the kind of mistakes you learn by, and understand them well enough to advise you as the buyer to talk to your lender and your attorney FIRST. You are VERY best to consult an attorney on the terms of such an agreement and expect to pay $600 to $800 for that counsel and paperwork.
Keep in mind that if the property is not free and clear of any lender, the lender can call the note at any time which may force your exercise of the option as the seller will have to suddenly satisfy the note.
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Tom Inglesby, Broker
RE/MAX Equity Group Inc
Lease-options can be tricky, but here are some general points on how they work.
1. The lease is the contract that establishes rent for the property which may or may not include a premium above the rent rate. The 'premium' remains in an escrow account and accumulates over the life of the lease agreement such that when the buyer chooses to exercise the option, monies have stacked up that serves as partial downpayment. Meanwhile, the monthly rent monies pass through an escrow company to the seller. So, if your monthly rent is $1,000, try and afford $1,200 or $1,500 so those additional monies stack up over time. You may also choose an interest bearing account that a title company will assist you with establishing. Those monies are also protected in escrow should you choose to not exercise the option, but you will be losing the option 'price'.
2. The option 'price' is a price which may or may not be credited to the eventual price of the subject property. The seller & you as buyer may negotiate this option price and there is no standard. The option is a recorded document. The option has an expiration date. Additionally, provisions within the option agreement for transferability and setting property price are agreed. You do not typically set the price on the property at the time of option agreement, but in the future when the option is chosen to be exercised. As the buyer, If you set price now, the property may decline in value when you choose to exercise the option such that appraisal may be an issue and moreso buying a property for more than what it is worth. On the other hand, the property may appreciate in value over this time. Typically, any seller under good counsel will agree to setting the price when the option is chosen to be exercised. This is so the seller may gain in appreciation, but in this market who can predict pricing 2-5 years from now.
3. Lastly, hire a good attorney to handle the paperwork. If there is a broker involved, they don't get paid until the option is exercised and the property actually sells. This may relieve a seller who would want to collect enough monies now to cover any requested broker fees and which would ultimately become more expensive for you up front.
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