The lease option arrangement will involve three agreements:
- Lease Agreement
- Option Agreement
- Sales Contract
Lease Agreement. The Lease Agreement will cover the basic points of the terms for the rental period. These terms are similar to those found in other straight lease agreements and include:
- The length of the rental period in months or years
- Monthly rental rate
- Payment process (where and how rent is paid)
- Security deposit amount and what happens to it when the lease ends
- Any notices about late fees, NSF payments, general rental site policies, etc
Key elements to include in the Lease Agreement include a provision requiring the owner to continue regular mortgage payments directly to his lender (if a mortgage is outstanding), assurance all insurance will remain in effect at the owner's expense, and a description of how maintenance and repairs will be handled. If the buyer agrees to start maintaining and repairing the property upon move-in, then it is advantageous for the Lease Agreement to spell out how these expenses will be credited back to the buyer toward the home purchase.
A special note about mortgage payments. This is very important. If the home seller fails to make proper payments, the home could enter foreclosure, leaving the buyer with a worthless agreement and no home. It is recommended to include the seller's existing loan details, such as the mortgage number, bank name, payment amount and due date, in the Lease Agreement. The seller must agree to continue all necessary payments in full to the bank.
Option Agreement. This agreement gives the buyer the right, or option, to buy the seller's home at a future date. The home's selling price is not disclosed in this agreement, but there are important figures listed, including
- The price of the option fee. This usually varies from 1% to 3% of the Purchase Price
- Potential options credits applied from monthly rent
- How and when the Option Fee would be paid
- A time frame or deadline for the option to expire
- If the Option Fee is refundable or not
In general, the Option Agreement will require the seller to NOT sell the home to any other party, as long as the current tenant-buyer is within the option period and is abiding by the terms of the agreement. In addition, the tenant-buyer may choose to not execute the option after all and not buy the home. In this case, the buyer should be prepared to forfeit the Option Fee and other related deposits paid in advance.
Sales Contract. The Sales Contract provides an outline of the terms and conditions related to the purchase of the home. These contracts are a bit more standard than the Rental Agreement and Option Agreement. Real estate agents usually use their own contracts. If buyers have engaged with an agent, the agent can draft up the detailed sales contract quickly. The sales contract will cover a few main points, including
- Purchase price of the home
- Detailed list of any items included, such as appliances
- Any home inspection requirements
- Financing details on the new loan
- Title insurance details
The terms of the title review and home inspection are particularly important. Although the rent to own home buyer may have been living in the home for an extended period of time, it is vital to be sure the title is clear and that a professional physical inspection be passed prior to purchase. Hidden liens or significant physical problems with the home may exist. If so, they must be cleared up before the purchase closes.