October 28th, 2009

No Comments

Long Term Lease to Own – Part III – Contracts

There are two agreements you need – rental agreement and purchase option. Our Do-It-Yourself Kit: Long Term Lease To Own provides all of the contract forms you need. The rental agreement should have all the regular rental terms such as the security deposit, late fee, pet policy etc. Consider the purchase option agreement an addendum to the rental agreement. The addendum cannot stand alone by itself. The rental agreement must be in place for the purchase option agreement to be in full effect. This is a rather important concept so that the purchase option agreement becomes invalid, should the tenant default on the rental. This also means that the purchase option alone cannot be assigned to other buyer.

The purchase option is where the lease to own terms are specified. Some important terms are:

Specify the dates when tenant can exercise their option.

You want to have a specific date range in which this can occur. It is not preferred to allow the tenant to exercise any time before the option expires. We recommend a window of 1 to 2 months before option expires. This provides a reasonable time should the tenant decide to exercise. It also recommended is to request 30 day in advance notice from the tenant if he intends to exercise.

Specify the monthly option premium amount

Since two agreements – rental and purchase options are in place, this is possible. Here is an example of how to specify the monthly option premium. First in the rental agreement, it is stated rent is $1,050. In the purchase option, monthly option premium is stated as being $75, thus the rent is reduced by $75.

Specify the initial option premium amount

If you’d like, you can collect a separate option premium in addition to the rental deposits at the signing of the agreements. However, most tenants are not financially well off enough to make such a payment. Instead, you can arrange it so that tenant’s rental deposit and pet deposit are served as option premiums and can be counted toward the down payment. I’ve had tenants before that even opt to pay more option premium because the money is set aside for house purchase eventually.

Option premium refund policy

Whether the premium is fully, partially, or not refunded, various scenarios should be addressed. In general, in the case of buyer’s default, the option premium is nonrefundable. In the case of seller’s default, it is refundable. It is not uncommon that a middle ground is met for a premium refund. Our Do-It-Yourself Kit: Long Term Lease To Own expands this area for the best protection for both parties.

Sale price

Traditionally, the sale price is set at the time of entering the lease to own agreement. However, that is not what we prefer. There are many creative ways to set a reasonable sale price between the buyer and seller. We recommend having the sale price determined at a later time when the option is exercised. The price can be based on the average appraised value from both buyer’s appraiser and seller’s appraiser. Furthermore, a price range can be set to protect both seller and buyer. The floor price ensures that the seller won’t incur capital loss and the ceiling price ensures that the buyer won’t overpay.

Tenant’s responsibilities

The owner can shift some maintenance responsibilities to the tenant. The items that fall into tenant’s responsibilities should be stated on the agreement. For example, the owner might have provided appliances like refrigerator, but the tenant can be responsible if the unit is not working. It is also recommended to purchase a home warranty. Structure the contract so the cost of home warranty purchase can be split between the owner and the buyer, or have the buyer responsible for home warranty service fees, which will typically be between $40-60, whenever a repair service is requested.

Continue to Part IV » or

Read Part II «

You can leave a comment, or trackback from your own site.

Leave a Comment

Click here to cancel reply.

Name (required)

Email (will not be published) (required)

Website

	Enter the CAPTCHA text below (required)