A rental option (more formal Lease with Option to Buy ) is the type of contract used in both residential and commercial real estate. In the lease option, the property owner and the lessee agree that, at the end of the specified lease period for a particular property, the lessee has the option to purchase the property.
Rental options are different from lease purchase contract , since lease purchase is binding on both parties in the sale, while in lease option, buyer has option but seller does not.
Video Lease-option
Residential example
The example below outlines a typical rental option for residential properties; Commercial lease options are usually more complicated.
A contract is usually between two parties: a lessee (also called a tenant or tenant-buyer), and an owner (lessor), who owns or has the right to rent or dispose of the property.
To have a valid option, the tenant buyer must in many cases provide "valuable consideration" (cost) for the option. Generally, the seller will ask for as much as possible - often about 3% -5% of the purchase price. The tenant-buyer will usually want to give as little as possible - even the token amount of $ 100 represents "consideration." The option gives the tenant the right (but not the obligation) to buy the property at a later date. The lease option only binds the seller for sale, does not bind buyers to buy. It makes it a "one-sided" or one-way deal. In contrast, lease purchase is a bilateral agreement, or two-way.
The basic elements of a lease option are:
1. Buyers buy option. The parties agree on what the options cost. As mentioned above, it can range from the number of tokens up to 5% (or more) of the property value. Option fees are usually non-refundable. That is, if the tenant-buyer fails to use the option, the money stays with the seller. It was not refunded. The reason: Option fee is not a deposit. Option cost has been used to buy something of value: options.
2. The parties agree on the purchase price. It can be decided that the price will be the assessed value at the time the option is exercised. Generally, however, the purchase price is agreed at the beginning of the option.
3. Length in residential real estate is usually 1-3 years. However, it is often unwise for tenant buyers to agree on short time periods (often 2 years or less). Renters often expect that the property will value its value, especially if the agreed purchase price is equal to or higher than fair market value at the commencement of the option. Perhaps more importantly, often the buyer-lessee has credit or other financial problems that prevent him from buying immediately. The option period is used to strengthen the tenant-buyer's credit, collect the rental credit, and position itself to buy. It can often take several years.
4. How much monthly lease payments, whether any rental payments will be credited against the purchase price reduces the amount of purchase. Often, monthly rent payments are equal to or slightly above the fair rental of the property market. And while it's entirely negotiable, credits in the 15% -25% range are often offered. So, for example, if a fair market rent for that unit would be $ 1,000, the seller might charge $ 1,100 with $ 200 of which is credited against the purchase price.
5. Whether the tenant-buyer will occupy the property or whether the tenant/buyer has the right to rent or the right to sell the option. In many cases, the tenant-buyer occupies the property. The seller will usually try to make one of the terms of the agreement.
6. An investor may acquire property suffering with rental options and make improvements to the property. Then the investor can sell the option to the buyer who is willing to pay the new market value for profit. This is a common financing technique with investors. However, this is more risky than other methods that investors can use to control property. The risks include the seller's inability to transfer a clear title when an investor seeks to use the option. In this case, the investor will make repairs (sometimes substantially) to properties that are not owned and can not be obtained. If the investor is considering something more than an increase in cosmetics, he may consider other control methods such as confidence of the land or acquire property using what is referred to as a "subject to" transaction (or Sub 2).
6.a Example: Seller owns property that requires a lot of work. Retail buyers usually can not get financing or too many choose to bother with properties that have physical difficulties. Investors go into lease option agreements to say $ 100,000, rehabilitate property with about $ 20,000 and now a market value of about $ 135,000 an investor can sell the right to buy for $ 35,000 and a new buyer will close with a genuine seller for $ 100,000
6.b Another example: A buyer buys the same property and uses his own money for rehabilitation and can use the rehab money for the down payment. This allows buyers to NOT have to come with a large down payment and rehab money.
Everything works like a rental unless there is a schedule when the buyer can decide to buy the property.
Rental provisions should be negotiated as well. These include items typically found in rent: maintenance, utilities, taxes, pets, how many occupants, insurance, the ability to make modifications to the property, and so on. One note: The term of maintenance in a rental option is often different from that in a standard lease. In ordinary leases, often the owner is responsible for all repairs, except - sometimes - with $ 50- $ 100 per deductible incident. Basically, the owner is responsible for almost any repair. In the lease option, it is often a greater burden for repairs to be transferred to a tenant's buyer.
During the term of the lease option, the lessee makes rental payments to the owner for the use of the property on mutually agreed terms. At the end of the contract, the lessee has the option to purchase the property directly. Tenants do it by getting out and getting a mortgage.
Excess credit can also be applied to the purchase of property lately, or against a down payment on a mortgage (ATTENTION, the buyer and seller can approve whatever they want, but when the buyer gets a permanent financing, the bank has guidelines for what can be applied to the payment of money face or purchase.Usually the bank only allows the amount above and beyond the market rent to be considered for down payment.) In this case, the rental option serves as an automatic saving plan for the tenant. This down payment is applied as part of "option cost consideration"; in the arena of purchase of this lease option is the fee charged for the right to purchase the property.
Maps Lease-option
Reasons for using rental option
Buyers
1. The buyer is relocating and may need to sell the property in another area before the buyer can qualify to buy a new home.
2. The buyer may have some credit issues that can be resolved during the option period.
3. The buyer may have started a new business and if it does not qualify and can pay the payment.
4. The buyer may not have enough funds for the down payment.
5. Buyers move and are not familiar with new areas. He wants to "feel" the area - security, school quality, comfort, etc.
6. Buyers are looking for a VA loan and its properties do not meet VA's assessment guidelines. Buyer agrees to make necessary repairs during the lease period so that the property can meet this specification.
If there is no payment, the seller may release the tenant through the eviction, which is likely to be cheaper than the confiscation of the mortgaged property. Rental options may also require less money up front, while mortgages may require a substantial down payment from tenants.
If the lessee does not use the option to purchase the property at the end of the lease, generally the advance advance option along with the money rented by the lessee in addition to the market rent price for this option may be retained by the owner depending on the agreement. This may happen if the tenant no longer wants to buy the property, or if the tenant wants to buy the property but is unable to obtain the necessary financing to do so.
Seller
Rental options allow sellers to sell properties that may not be for sale. In many cases, the seller can make more money when offering the terms to the buyer. Sellers can often avoid paying the cost of a real estate agent by using an option-lease agreement (because they have found the buyer itself).
There is an expression, "Price or condition, choose one;" the seller may be able to sell at a better price (or sell the property period) by offering an attractive provision to the buyer (s). For the buyer to get a favorable price, the terms usually have to benefit the seller.
If the buyer and contract defaults are correctly arranged then there is an owner relationship of the auto tenant land. All valuable considerations are usually submitted and then it will be evictions.
Some forms of option-lease agreements have been criticized as predators. For example, sometimes rental options are offered to tenants who can not realistically expect to use the purchase option. Sometimes the option-rent period is for a short period of time (6 months, for example) that the tenant's buyer has little chance of repairing his credit, saving money on advance payments, or resolving any other issues.
See also
- Rent to own
- Buy a lease
- Rent with option to purchase
External links
Source of the article : Wikipedia
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