From Elizabeth Weintraub,
Your Guide to Home Buying / Selling.
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Lease option sales were popular financing instruments in the late 1970s and early 1980s. They were primarily used as a way to circumvent alienation clauses in mortgages. Proponents claimed the sale was not really a sale because it was a lease; however, courts argued otherwise.

Today, options to purchase, lease options and lease purchase agreements are three different financing documents. The variances are state specific and not all states have identical laws. Before entering into an agreement with a seller, buyers should obtain the advice of a real estate lawyer. The information below is an overview and is not meant to be construed as legal advice.

Basics of an Option

• Buyer pays the seller option money for the right to later purchase the property. This option money may be substantial or as little as $1.

• Buyer and seller may agree to a purchase price now or the buyer may agree to pay market value at the time the option is exercised. It is negotiable. However, most buyers want to lock in the future purchase price upon inception of the option.

• The term of the option agreement is negotiable, but the common length is generally from one year to three years.

• Option money is rarely refundable.

• Nobody else can buy the property during the option period.

• The buyer can sell the option to somebody else.

• If the buyer does not exercise the option and purchase the property at the end of the option, the option expires.

• The buyer is not obligated to buy the property.

Basics of a Lease Option

• Buyer pays the seller option money for the right to later purchase the property. The lease option money may be substantial.

• Buyer and seller may agree to a purchase price now or the buyer may agree to pay market value at the time the option is exercised. It is negotiable. However, most buyers want to lock in the future purchase price upon inception of the lease option.

• During the term of the lease option, the buyer agrees to lease the property from the seller for a predetermined rental amount.

• The term of the lease option agreement is negotiable, but the common length is generally from one year to three years.

• The option money generally does not apply toward the down payment.

• A portion of the monthly rental payment typically applies toward the purchase price.

• Option money is rarely refundable.

• Nobody else can buy the property during the lease option period.

• The buyer generally cannot assign the lease option without seller approval.

• If the buyer does not exercise the lease option and purchase the property at the end of the lease option, the option expires.

• The buyer is not obligated to buy the property.

Basics of a Lease Purchase

• Buyer pays the seller option money for the right to later purchase the property. This option money may be substantial.

• Buyer and seller agree on a purchase price, often at or a bit higher than market value.

• During the term of the option, the buyer agrees to lease the property from the seller for a predetermined rental amount.

• The term of the lease purchase agreement is negotiable, but the common length is generally from one year to three years, at which time the buyer applies for bank financing and pays the seller in full.

• The option money generally does not apply toward the down payment.

• A portion of the monthly lease payment typically applies toward the purchase price.

• Option money is nonrefundable.

• Nobody else can buy the property unless the buyer defaults.

• The buyer typically cannot assign the lease purchase agreement without seller approval.

• Buyers are often responsible for maintaining the property and paying all expenses associated with its upkeep, including taxes and insurance.

• The buyer is obligated to buy the property.

Doing a Lease Option / Lease Purchase

Hire a real estate lawyer to draw the documents and explain your rights, including those of possession and default consequences. The property might be encumbered by underlying loans that contain alienation clauses, giving the lender the right to accelerate the loans upon sale.

Sometimes sellers give the option money to their real estate agent as full payment of commission. Agents are not always involved in the exercise of lease options or fulfillment of lease purchase agreements and, even if you have retained real estate agent representation, you still need a real estate lawyer. Agents are not lawyers and cannot give legal advice.

In the event of a lease purchase, obtain all the disclosures and do your due diligence just like you would on a regular sale. This means:

• Get a home inspection.
• Examine the title policy.
• Obtain an appraisal.
• Read seller disclosures.
• Consider obtaining pest inspections, a roof certification, home warranty plan and hiring other qualified inspectors.

Lease Purchase Benefits for Sellers and Buyers

Lease purchase agreements are commonly offered by sellers of hard-to-sell properties. Think about it, if the property was easy to sell, the seller would sell it to a conventional buyer who would pay the seller cash.

• Sellers generally get market value at today's prices and relief from paying a mortgage on a vacant property.

• Although the lease payments may exceed market rent, the buyer is building a down payment and banking that the property will appreciate beyond the agreed upon purchase price.

• Buyers generally make a small down payment, with little or no qualifying, making a lease purchase an attractive way to ease into the benefits of home ownership.

• Buyers also receive a forced savings plan since part of the lease payment is credited toward the purchase price at the end of the lease option agreement.

• If the buyer defaults, sellers do not refund any portion of the lease payments nor the option money and may retain the right to sue for specific performance.

For more information, contact a real estate lawyer.