What are the typical terms for a lease option in CA?

Asked by Steve, Michigan Tue Oct 16, 2007

Are there any specific issues to be aware of in CA regarding lease options? I would like to offer my current 2bd/2bth condo as a lease option. A straight rental in my complex would probably get $1700 a month.

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Mike Kelly A…, Agent, Santa Rosa, CA
Tue Oct 16, 2007
With a lease/option you simply have a lease agreement which acts as a "first right of refusal" on the subject property at the end of the lease term. You may wish to apply a certain amount of the agreed upon "lease" payment to go towards the down payment when the "option" is exercised. Some landlords raise the lease term to not get dinged on their rent. With your $1700/month rent example, you may raise that to $2,000 and have the difference applied to the down payment at the end of the lease/option. Say you agreed to a 2 year lease/option. At the end of 2 years you'd have $300.00 x 24 = $7200.00 the prospective tenant/buyer would subtract from the agreed upon purchase price as part of their downpayment. You don't LOCK in a purchase price today!! This would be a Lease/Purchase agreement where you basically write an offer today at today's prices and then have an option to exercise the contract at the agreed upon due date. I would strongly advise any buyer AGAINST doing this!! Condo's are taking a major beating in today's market so agreeing to a price today would be folly as they could be a lot lower in 1 or 2 years.
Are you doing this to get out of making the payment on your condo? Do you think the "greater fool" theory will come into play on this lease/option and a buyer/tenant will be willing to undertake YOUR headache? What I'm getting at is there are many scenarios for doing what your trying to do and most of them simply wish to transfer a payment structure the owner can't pay to someone who can't pay it either but who goes after the carrot of homeownership and attempts to make the payments. Delaying the inevitable will not solve most homeowner's problems today.
1 vote
Deborah Madey, Agent, Brick, NJ
Tue Oct 16, 2007
We've done options in NJ with the price predetermined. We only term it a lease/purchase if it is a solid purchase, and not only an opiton.

We have also done an upfront option payment and then the tenant pays fair market rent.

I have directly been involved w/ lease options that have converted to a sale, but the bank refused to count the tenant's above market rent payments toward the downpayment. This nearly prohibited the buyer from being able to qualify as they did not have additonal funds for down payment. It wasn't that the seller wouldn't credit the money, it could not be counted toward the down payment per the lender's assessment of what the lender thought was fair market rent.
2 votes
The answer to that question and to alleviate any mishaps with the credited money, have an escrow company do the accounting. Once the lease option goes to escrow, there is no questions as to where the additional monies are accounted for.
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Dot Chance, Agent, Burbank, CA
Thu Oct 18, 2007
Hi, Steve. I have an answer that is quite different from the others. My husband and I successfully purchased our home 7 years ago through a lease option. We are going to see more and more lease options unless our market drastically improves. I represented a seller and we ended up letting someone lease option the home.

There are many different ways to do the lease option. I won't give you all the details of our deal in this forum but we first agreed upon a sales price of the home then we agreed upon the monthly lease payment. We ended up getting a credit to go toward our downpayment plus we made option payments every few months through the term of our lease.

Not everyone who does a lease option has bad credit! Sometimes it is as simple as they are not sure of the area OR they simply need help with the downpayment. Hope this info helps!
Web Reference:  http://www.DotChance.com
1 vote
Jim Walker, Agent, Carmichael, CA
Wed Oct 17, 2007
Lease option is a great idea in theory but it rarely works well in actual real life, in the 21st century.

If an owner occupant buyer can't qualify for the loan today, it is pretty unlikely they will qualify for a loan in two years. -

Many years ago, in the previous century, owner occupant buyers needed large down payments and It used to be that down payments were the main obstacle to home ownership. In the past ten years , many zero and low down payment programs have developed for qualified home buyers.

(investors and unqualified buyers still need down payments)

So since the down payment is no longer the problem, why do unqualified buyers that can't get a home loan think they want a lease option. One reason is if they have terrible credit, and they think it will improve. Okay, but Steve, do you want tenants with terrible credit?

Another reason they might not qulaify for a purchase loan is that they do not have the income to make the payments. --- Steve, that means they don't have the income to pay your rent plus an option fee.

Very few lease option agreements turn into sales. I advise pursuing a pure rental strategy or a pure sales strategy. You could still consider the lease option strategy , if the prospective buyer or tenant suggest it.
1 vote
Sylvia Barry,…, Agent, Marin, CA
Thu Dec 27, 2007
http://www.China.com took me to a site with a huge warning from Spyware. So you might not want to click on that link ...
0 votes
Richard M. J…, , Sherman Oaks, CA
Thu Oct 18, 2007
Hi Steve, you should definately ask for more than $1700. Probably $2500 a month for a lease option. I would include that in the agreement and the difference to be credited to the price of the home or credited to buyers closing costs if the buyer purchases the home on the 12th month.
0 votes
#1, , San Francisco Bay Area
Wed Oct 17, 2007
Lease options are terific for owners/investors that can't get their home sold.

They can collect an "option deposit" up front and they can collect above market rent from a "prospective" buyer.

Chances of a buyer making good on a lease option in this market is slim to none.

People generally look to lease options due to current bad credit. Chances are, if they have bad credit now, they will still have bad credit two years from now.

The owner/investor gets to keep the lease option deposit and the difference of the higher rent payments if the lease optioner doesn't exercize the option in the time agreed to.

You'll see more of these as people lose their homes through foreclosure. These people have to have somewhere to live, they still want to own a home and they don't want to just pay rent. They want to at least "sniff" homeownership.
0 votes
Richard M. J…, , Sherman Oaks, CA
Tue Oct 16, 2007
Hi Steve, Actually I would advice you to set a price of around $1700 a month with a lease option of $2500 a month. If the renter decides to purchase the home at a future date, the difference between what it would rent for and the lease option amount would be calculated and reduced from the price of the home. You can set a predermined amount for the home now if you think prices will fall. At the end of the lease, either the buyer will walk away and you keep the additional profit or he/she will buy the home. If you base the home at market value at the end of the lease knowing home prices will continue to fall till end of next year, you might be putting yourself at a disadvantage. Negotiate the purchase price at the beginning and charge the higher amount to secure your interests. Good luck.
0 votes
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