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Should I offer a lease/option?

QUESTION:

We have our house for sale and have been asked whether we would consider a "lease-option." What does this mean?

ANSWER:

The term "lease option" is an abbreviated reference to a "lease with an option to purchase." This can be an excellent way for a tenant to use property and be sure it is suitable before committing to buy. This can also be very advantageous to an owner who is not in a hurry to close on a sale and is willing to be a landlord.

An option to purchase gives the tenant a right to purchase the property at a certain price, on specified terms and within a stated period of time.

In order to bind the owner and to make the option to purchase irrevocable, the option must be supported by "valuable consideration." In other words, the tenant must pay a fee for the owner to hold the property off the market exclusively for the tenant for the agreed period of time.

The right to buy may be exercised solely by the tenant, and the tenant is not obligated to buy. If the tenant decides to purchase the property, he must do so before the stated time period. If the tenant decides not to buy and the stated time expires, then the owner is free to sell the property to anyone else.

Usually, the lease is written so that the tenant’s right to continue to occupy the property will also terminate when the option period ends. However, the parties could agree to extend both the lease and the option or just to extend the lease but not the option.

Since the option right is exercisable only by the tenant, there is no advantage to the owner unless the owner is paid for the privilege given to the tenant. In a seller’s market, this payment may be in the form of a significantly high fee or a rent premium or perhaps a higher purchase price than the owner might normally expect to receive.

In a buyer’s market, the fee might be lower or the owner might give the tenant a credit towards the purchase price for each monthly rent payment made.

While lease options can be advantageous to both parties, an owner must be careful that the agreement does not become more of a financing arrangement than a lease. Such arrangements are more appropriately called "agreements for deed." In such cases. if the tenant stops paying the rent and refuses to leave the property, the owner may be required to commence foreclosure proceedings rather than being able to use eviction proceedings which would be simpler and less costly.

This information is not intended as specific legal advice to anyone and is based upon facts that change from time to time. Individuals should seek legal counsel before acting upon any matter involving the law.

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