Lease Options and How They May Work For You
It may just be a lease option that will enable a seller to attract a future buyer to their home and enable buyers to afford to buy in this economy.
I always use an attorney to draw up a lease option agreement. I usually pay under $500.00. There are three components to the lease option:
•1. The Option Agreement
•2. A Buy Sell Agreement
•3. The Lease.
In most situations the option agreement and the lease are executed (signed) by both parties, and the option agreement will refer to an attached buy/sell agreement and it's agreed upon terms. The essence of this transaction is that the buyer agrees to buy an option to purchase the home at some future date at either an agreed upon price or an agreed upon formula to arrive at a price. This agreement is executed along with a lease for the property.
Let's look at a real life example:
Seller Bob is retiring and wants to move from Fort Myers and sell his waterfront home and move to a smaller, less expensive retirement home. Bob has two mortgages on his home totaling $600,000 that cost $7500 a month including PITI. (Principal, Insurance, Taxes, and Insurance) His home has been on the market for almost a year and was originally priced at over one million dollars. He is current on his payments, but his income is well below the $7500/month cost and he is eating away at his retirement nest egg every month he owns the house.
Buyer Ralph and his wife have a large home that has $200,000 more in debt that the house could reasonably be sold for. Ralph and his wife own their own business, have children and have good income. They have stopped making their mortgage payments. Their credit is bad but their income is strong and steady.
Ralph agreed to lease Bob's house for $7500/month and pay $20,000 to buy an option to purchase the home in two years. $2000 of each monthly rental payment will be applied to the purchase price as will the option monies.
What do Bob and family get? First of all, they get to move into a house, on the water, for very little down payment. They now have locked in the price that they will have to pay in two years (Keep in mind this is an OPTION, if prices continue to plummet, they do not have to buy - it's their OPTION). (Note - I am not disclosing the price, and will not until it is sold, but it was well less than the $1,000,000)
Bob gets a tenant in his home that will treat the home as his own, he breaks even on his monthly payments - and gets some tax advantages as well at tax return time.
I was able to negotiate for these folks that the amount of the lease payments would be the interest payments on the two notes (the rates are fixed) plus insurance costs and taxes. We all expect these costs to go down over the next two years, and the monthly payments by Ralph will adjust accordingly.
The option money, by the way, was split between the owner and the broker. When the home eventually sells the commission will be the same as per the listing agreement, less the commission paid from the option money to the broker at the inception of the lease. There was no lease commission.
I love a deal where all parties are happy. Bob was happy because he got out from under the drain of cash flow loss. Ralph and his wife are thrilled because they were able to negotiate a good price at today's depressed market values, and lock in a home they love.
(This was an actual lease option we negotiated on behalf of our clients; some of the details were changed to protect privacy).
If you are thinking or buying or selling on a lease option, talk to us, we can help. Here are some caveats that you must keep in mind and have your attorney address in the agreements:
•· Potential default by the owner/lessor on the underlying mortgage.
•· Maintenance Items - who is responsible for what.
•· Amount or rent applied to Purchase Price - if any.
•· Remedies for default by Lessee.
•· Insurance and tax issues.