Lease Of Real Property With Option To Purchase The Real Estate
A lease with an option to purchase is a type of contract in which the property owner and tenant agree that, at the end of a specified rental period for a given property, the renter has the option of purchasing the property. The purchase price can be set forth at the time the option agreement is signed or may be set at the time the option is exercised by a current appraisal of the property. Although option money is rarely refundable, it is often applied toward the purchase of the property at the time of closing. Although the buyer is not obligated to buy the property, the seller may not sell it to anyone else during the option period. However, if the buyer does not exercise the option to purchase at the end of the option period, the option expires, as does his right to purchase.
What’s good about a lease purchase for tenant buyers?
There are several reasons why someone would want to lease a home with an option to purchase:
- They need time to resolve credit problems and want the home.
- They want the home but need to build up a down payment.
- Rent money is working toward the purchase or option money is credited toward the purchase.
- Profit from appreciation: The fair market value of the real property may increase during the option period.
What’s in it for the sellers or landlord?
- The rent or option payment increases the return on investment and stays with the owner, even if the tenant does not purchase.
- The owner can lock-in a reasonable price for the home.
- The lease purchase option may bring in an excellent tenant with long term occupancy.
- If the tenant thinks they may end up owning the home they will normally keep it in better condition throughout the lease.
- The owner’s carrying costs and repairs to the premises may be covered by the tenant pursuant to the lease agreement and providing a positive cash flow.
What risks does a lease option hold for the buyer or the seller?
- Individuals who attempt to buy homes on a lease option rarely end up buying the home. If this happens, the tenant loses his option money and may have overpaid for renting the premises and having the repairs and maintenance done at the tenant’s expense.
- There are risks associated if the seller goes bankrupt, thereby making the property unmarketable without the approval of a bankruptcy trustee.
- If seller’s creditors file liens against the property it may be difficult to sell the property without paying in full all the lien holders.
- If seller fails to stay current on mortgage payments, the property may face foreclosure.
- The possibility that seller may disappear, die, or decide not to sell the property.
- The due on sale clause in the seller’s mortgage deed – although probably unlikely, granting of an option may constitute a transfer of the property which allows the seller’s lender to demand that the seller’s mortgage loan be paid in full.
- If the option is recorded, and buyer does not buy, it may be difficult to sell the property without getting a release of the option.
Things to consider when utilizing a lease – option :
- Do a home inspection and document necessary repairs.
- Make sure the landlord keeps current on mortgage tax and insurance payments for the property.
- Do a title search to verify if there are any liens against the property.
- Make sure both the owner has homeowner’s insurance and the tenant obtains renter’s insurance.
Limitations on the Provisions of the Lease Agreement
- Security Deposits – the maximum security deposit under Connecticut law that a landlord can demand is two (2) months’ rent. In the case of tenants sixty-two (62) years or older, the landlord can only require one (1) months’ rent. The security deposits must be kept in an escrow account and separate from the other funds a landlord collects. Interest is paid on the tenant’s security at the rate of 1.5%. Kept deposits are not legal.
- Fair Housing – No discrimination based on race, creed, color, national origin, ancestry, sex, marital status, age, lawful source of income, familial status, physical disability, mental disability, sexual orientation.
- While it is permissible for landlords to screen tenants for credit history, it is not permissible to deny someone housing based solely on the basis that Section 8 will pay a portion of the rent.