What is the best way to do a lease option to purchase?

Asked by Kristin Kohnke Schaff, Lake Oswego, OR Fri Oct 10, 2008

I have a listing and have been approached by a buyer's agent about doing a lease option to purchase. They want a 12 month lease. Lease options haven't been very common here. How much does the buyer usually put up for option money?Is that considered part of the earnest money, or best to keep it separate?

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Dale McNabb, Agent, Eaton Rapids, MI
Thu Oct 30, 2008
I write it up as a purchase, to close on or before 1 year or whatever date. Then I spell out all the lease terms, monthly payment, beginning on what date, lease option money amount down and any other terms such as monthly money applied to down payment at the end of the lease term. Should the buyer not perform at the end of the option term, seller retains all the money. I just completed a lease option where the buyer put $5000 up front, of which I retained 1/2 which will be applied as credit on the full commission when we actually close in 8 months. It was spelled out in the contract and the other $2500 became good faith money.
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Tom Inglesby, Agent, Portland, OR
Thu Oct 30, 2008
The first question if why a lease option? I would have the buyer qualify under a few different ways. Check with the lender on how much of the rent or rent plus extra rent (option money) can go towards the down payment? What happens if the house goes down in value will the seller take the lower price or does the buyer lose the option money? I would have a lawyer draw up these different options. Biggest problem is most buyers think that their rent can be applied towards the down payment and that is not correct. Can the buyer put a cloud on the title and the seller cannot sell it if there is an option. My opinion let an attorney do everything. If I was the seller I would just rent the house out. If the seller is going a wrap around their old mortgage in most cases this is illegal. Can the seller rent the house out legally and is the house free and clear? Good Luck

Tom Inglesby, Broker
RE/MAX Equity Group Inc
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Crystal, , Portland, OR
Thu Oct 30, 2008
The most recent lease option I came across was where the client had the option of a one year lease or a two year lease option. If the buyer's bought the home by the end of this year, they would purchase the property for the current list price. BUT if the buyer's chose a one year or even the two year lease option, then the price would be considerably higher. I believe that is a risk the buyer takes. It is hard to predict what the home values will be a year from now, yet alone two years from now. The buyer could lock in a price that is substantially higher than the market value at that time. The client had to put down $5,000 non-refundable in order to lock in the lease option terms. A portion of their rent money was allocated towards the purchase price every month. Lease options can be customized to meet both the buyers and sellers needs. If you are considering a lease option, make sure the terms are negotiable. Check with your principal broker about their requirements for a lease option.
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Janeese Jack…, Agent, Portland, OR
Fri Oct 10, 2008
Over the years, I have written up a couple of leases with an option to purchase (unfortunately, none have ever closed). I do believe that psychologically, lease option purchasers tend to enter the agreement with a "tenant state of mind" and never take true "ownership" of the home. The option amount is negotiable (just like earnest money) and is usually non-refundable. There are other enticements that could be included, such as a portion of the rent going towards a down-payment, etc. You may need to refer to your Principal Broker for particular requirements which individual brokerages may insist. Good luck...
Janeese Jackson, Principal Broker
Real Estate Resource
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Jean Pritcha…, , Gresham, OR
Fri Oct 10, 2008

I have written a couple option agreements in the past 6 months. The OREF forms (on line forms) has an Option agreeement. IT needs to be attached to an Earnest Money agreement. I also have a (drawn up by a lawyer for one of my buildets) a lease option form. Call me if you want more informtion. FYI--statistics right now are the about 20% of those who go into a lease option follow through. Jean
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Lana Lavenba…, Agent, Grants Pass, OR
Fri Oct 10, 2008
First of all in Oregon I have been told you have to have an attorney draw up the lease - you can only write the offer - but again - that is just my understanding. The lease and option are set up for whatever the buyer and seller will agree to - some sellers will do a lease having $10,000 up front released to them as the "option money" (in an offer we would call that earnest money). It is non-refundable and they decide whether or not it is applied to the purchase price. Affter that - the amount of the payment each month can be handled 2 different ways. Either one as just a rental payment or 2nd as rental payment plus extra to go toward the down payment. The total payment will not go toward the purchase price. Again that payment and the amount depends on what the buyer and seller agree to. and then - the final purchase price - in what? A year? Is the buyer going to be happy paying whatever price is agreed on today? What if prices go up? Will the seller be happy that they agreed to the "lower" price - or if prices go down more? Will the buyer be happy with the price then? So - many things to think about and negotiate. I hope this helps a little.
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