Rent with option to buy

Asked by Seller, 07024 Mon Feb 18, 2008

Is there a legal contract form? What are the essentials of such a contract? What can be varied in it to strengthen the seller's position?

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Don Tepper, Agent, Burke, VA
Mon Feb 18, 2008
Wow. There are entire courses on the subject. I'm not a lawyer, so what follows isn't legal advice. However...

If a Realtor is involved, he/she will be using Board-approved forms. If a Realtor is not involved, there are lots of variations of lease-option contracts. Check Jeff Beaubien's material at or Check Wendy Patton's material at I've bought both of their lease-option programs. They're both good, and they both have forms and other tips. Or check Jason Hanson's information at I know Jason personally; he's good, too.

Having said that, you absolutely need to make sure that the lease portion conforms to your state requirements. Items dealing with evictions, rent increases, responsibilities of the tenant and the landlord, etc.

So--and again, I'm not a lawyer--is there a legal contract form? Any contract is legal if both parties freely agree to it and if there's consideration (something of value) on both sides. Virtually anything having to do with real estate must be written and signed; it can't just be a verbal agreement. And it's got to be enforceable.

Generally, it's in the owner's best interest to have two documents: A lease and an option. If the tenant-buyer is initiating the transaction, it's generally in the tenant-buyer's interest to have a single document incorporating both the lease and the option.

What are the essentials of such a document? (Or documents?) The lease portion is pretty much a standard lease. The owner may, and often in a lease-option does, ask that the tenant-buyer pay for repairs up to a certain amount--say $100 or $200. But the lease portion is unremarkable.

The option portion is what does the "magic." The option gives the tenant-buyer the right, but not the obligation, to purchase a property within a defined time frame. It usually specifies a purchase price, but it doesn't have to, so long as it specifies how the purchase price will be determined.

Remember we said that contracts must have consideration? (Again, I'm not a lawyer, so...) If, from the tenant-buyer standpoint, it's all one document, then the consideration is the promise to pay $x in monthly rent and perhaps an upfront amount for the option. From the seller's standpoint, when there are two documents, and to better protect the seller, the seller often wants an option fee. That's an amount that the tenant-buyer gives to the seller. If the tenant-buyer exercises his option, that amount is credited toward the purchase price. If the tenant-buyer chooses not to exercise his option, that amount is forfeited and is retained by the seller.

Often in a lease-option, a portion of the monthly rent is credited toward the purchase price as well.

To answer your question regarding strengthening the agreements for the seller, the seller would want as large an option fee as possible. He'd want as much in rent as possible. He'd want a provision in the option agreement dealing with rental delinquencies endangering the option. (Some agreements just say that a late payment negates that month's contribution toward the option credit. Some say that one or two late payments voids the entire option.)

From the seller's standpoint, you do not want the option assignable or transferrable. (From the tenant-buyer's standpoint, he/she would want the option assignable or transferrable.)

From the seller's standpoint, you want a provision saying that the tenant-buyer's entire recourse in case of your default is the return of option fees and credits. Let's say, for instance, that someone puts a lien on your house and you aren't able to transfer ownership to the tenant-buyer. You don't want to be sued for specific performance. You don't want to have any further obligations, so you agree to pay back all monies that have been paid to you.

Also, keep the lease portion under three years. And make sure that the option period is no longer than the lease period.

There's lots more, but those are some of the basics.

Hope that helps.
2 votes
Freeman, , union hillside
Tue Jan 13, 2009
can you explain to me what i need to know about rent option to buy
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Demetrios Mi…, Agent, Englewood liffs, NJ
Wed Feb 20, 2008
This is definitely a question for your attorney and your acct. In addition to the contractual guidance your attorney can provide there may be associated tax consequences.

I live in Norwood and see that your zip is in Closter if you need help fom a real estate company please allow us to make a presentation. i think its important that you interview several agencies so that yoy make the right decision for you and your family. Good luck

If you need futher help please feel free to call me at 2015670880.
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Sharon Kozinn, Agent, Hillsdale, NJ
Mon Feb 18, 2008
Using an experienced real estate attorney will be your best bet. This way you will have professional and legal expertise on your side.

Sharon Kozinn
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Kathy Carter, , Bergen County, NJ
Mon Feb 18, 2008
When it comes to a lease with an option to buy everything is negotiable. I would suggest that you sit down with your attorney and create a document that work for you.

Good Luck!
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