Lease Options And More
While most residential real estate transactions involve a simple and direct buy/sell situation, there are occasions when other agreements are made to the benefit of both parties. The most prevalent are a Lease with an Option To Buy, or a First Right Of Refusal. Each has its own benefits, risk, and characteristics.
The phrase "lease to buy" is often used by someone promoting a lease with an option. The situation is most often called a "lease/option". In reality, there is no such thing as a lease/option. The structure of such a transaction is that of a lease and an option that are tied together. You can lease without an option and you can have an option without a lease. The lease option transaction allows you to take occupancy of the property in accordance with the terms of the lease while giving you an option to buy it at a later date on terms/ conditions contained in the option.
Option agreements generally have option consideration, money, that is given or credited. Leases with an option can be structured to provide that a portion of the rent paid is credited to the Optionee, Buyer, towards the purchase price in the event the Optionee exercises the option and completes the purchase. This is one of the benefits to both parties in having a lease with an option. The owner gets more than normal rent during the course of the lease, and the tenant builds a credit over time that will help in the purchase. The fact that the price is agreed on by the parties well in advance of when the sale actually takes place can be very beneficial to the Buyer in a rising market.
A first right of refusal is another often misunderstood and horribly applied real estate activity. While it can be a good tool for both parties, it seems as if it is usually given out of friendship or guilt. A common situation is that of a long term tenant when the owner decides to sell. The owner tells the tenant of the intention to sell. The tenant expresses the desire to buy the property but for one reason or another, just can't at that time. The owner tries to mollify the situation by promising a first right of refusal. There are many variants to this scenario, but regardless of the circumstances it is most important to remember that most often the granting of a right of first refusal is based on emotion, not business acumen.
The benefits of lease option agreements are usually financial and apparent to both sides at the outset. There are detriments that all parties must be aware of. The owner is tying up his property at a set price for a period of time. Yes, it can be sold, but only subject to the terms of the existing agreement. If the owner's circumstances change before the optionee is ready to perform, and the property is foreclosed on, the optionor may not be able to deliver, and most likely won't be able to return any option consideration that may have been advanced.
The first right of refusal agreement can really hamper an owner's selling efforts. While it sounds good to help someone you already have a relationship with, most Buyers don't want to make an offer when the circumstances of the property allow somebody else to match or better their offer and trump their position. It not only hampers negotiation, it usually kills all enthusiasm that may be generated for the property. Think about what happens when a transaction is conditioned on the sale of another home and the Seller has the right to accept other offers subject to a 72 hour release clause. The first right of refusal is even more onerous to most Buyers.
Our Advice: Owners may benefit financially or emotionally from a lease/option or right of first refusal situation, but the benefits may be far outweighed by the detriments if the transactions are not structured correctly. Everything must be in writing without extra promises on the side. In most cases you should record at least a memorandum of the agreement you have at the county recorder's office. Be very careful in such transactions. Get good assistance or you could find yourself tied up for years as a result of chasing a few dollars, or trying to make somebody happy that isn't the great friend you thought they were.
Business is business. Take care of your real estate appropriately.
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