What is a Lease-Option, Lease Purchase and Rent-to-Own?
Lease-Option aka Lease Purchase aka Rent-to-Own is an agreement that has two parts:
- Lease Agreement or Rental Contract. This document is the same as the one used to lease, rent a property.
- An Option to Buy the property. This document gives the buyer of the property, in this case also the renter the right to buy the property for a certain time period at a mutually agreed price.
These two parts can be two separate contracts or one. (Check our Rental Forms for the Lease to Own Package, instructions and forms, prepared by experinced attorneys)
Our attorney recommends creating a lease agreement and using a separate option to buy.
Real Estate options have been used in commercial real estate for a long time. In residential real estate, the option is usually combined with a lease, hence the name lease option, lease purchase or rent-to-own.
We are all familiar with a lease agreement. But how does it work with the option and what exactly is an option to buy?
An option grants a buyer t right to purchase a property at a fixed price within the length of time described in the option agreement.
For this right, he usually pays the owner of the property an option fee
What’s important to note is the buyer has the right to buy but not an obligation.
How much does a real estate option cost?
As an investor, you should try to minimize the option consideration but also make it appealing for the seller.
Try to keep the option at 5% or less. On a $100,000 property, that’s $5,000. You will not be losing this option money if you find a buyer and sell the property.
The amount you will pay depends on the time frame and the condition of the property and the motivation of the owner.
How long can an option contract stay open?
The option time frame is negotiated between the investor and the owner of the property. One to three years is typical in the US.
What makes an option contract legally enforceable?
An option agreement is like any other contract. It can be breached and if it is there are remedies like small claim court.
Does a lease option (rent-to-own contract) need to be notarized or witnessed?
In order for any agreement to be recorded in the public records, it needs to be signed and the signatures witnessed and notarized by a state-licensed notary public.
What happens if the buyer/tenant decides to break the lease option agreement?
If a tenant breaks the lease by not paying rent, the landlord can start an eviction. However, Landlords and investors should be aware that a tenant can claim ownership because of the lease option.
See e.g., Ward v. Estate of Ward, 1 So. 3d 238 (Fla. 1st DCA 2009) [34 Fla. L. Weekly D28f]; Toledo v. Escamilla, 962 So.2d 1028 (Fla. 3rd DCA 2007) [32 Fla. L. Weekly D1876a]. In amending s. 83.42 Fla. Stat. in 2013, the legislature set a bright line for distinguishing tenants from buyers. See McKinney v. Dickson, 21 Fla. L. Weekly Supp. 175a (Lake Co. 2013).
You need to check with your state law when a resident is not considered a tenant and consult a lawyer if you are selling on a lease option. (browardlandlord.wordpress.com)
(2) Occupancy under a contract of sale of a dwelling unit or the property of which it is a part in which the buyer has paid at least 12 months’ rent or in which the buyer has paid at least 1 month’s rent and a deposit of at least 5 percent of the purchase price of the property.
Can a seller back out during the option period?
Yes, it can happen but the buyer has the recourse of going to small claim court and getting his option money back.
Who pays the property taxes with lease-option and for repairs?
The option agreement should specify who pays for taxes, insurance, and repairs. That being said, if you transfer all these obligations, generally paid by a property owner to the tenant/buyer, they can make a case that this gives them equity in the property.
Apply the duck test “If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck” if you are not sure what responsibilities you can assign to the buyer/tenant.
What are the main components of a real estate option?
- Property Address and Legal Description
- Options Consideration Amount
- What Happens to the Option Consideration Money if the option is exercised. What happens is it’s not exercised.
- Purchase Price
- Date when the purchase price becomes effective and when it expires.
- The right to assign the option by delivering a certified mail with return receipt requested.
- The right to extend the option by giving written notice and payment of additional consideration.
- Responsibility of the seller/optionor to maintain the property.
- What happens is the property is destroyed – flood, earthquake, fire, etc. ? Does the buyer/optionee get his consideration back?
- Do the optionee, agents and optionee’s assigns have the right to enter the property to show, make repairs, improvements, etc.?
- Do the optionee, agents and optionee’s assigns have the right to apply for zoning changes and act on the name of the optionor in front of any regulatory bodies?
- Is the option going to be recorded in the public record or just Memorandum of Real Estate Option recorded?
- Signatures, Witnesses
How to find a lease option (rent-to-own) properties?
The best way is to contact landlords who already advertise their properties for rent. Look for properties that have been on the market longer and ask the landlord if they will consider a lease with an option to buy.
Lease Option Benefits
Benefits to the seller
The sellers’ main benefit of using a lease option is that it expands the pool of buyers and the potentially higher price achieved.
Benefits to the buyer
Control of property without having to qualify for a loan and without a downpayment.