lease option question

the tenant/buyer can exercise their option at any time during the option period and you should ask for 30 days' notice of their intent to buy. the option money goes toward their down payment if they purchase. you should make the option money nonrefundable and that is why i've heard it always called "nonrefundable option consideration". be sure to spell these things out in your contract and go over them with the tenant/buyer. hope that helps.

And, no they do not get their option money back.

suppose to give it back but I didn't know that it would be they're down payment when they purchase after the lease. That brings the question if you don't give it back how can they use it as a down payment when they try to get a loan from the bank to buy the house?

When I do a lease option, I make copies of every check they give me. It helps show the mortgage company/bank that they have been consistently paying, and then they the mortage is almost like a refinance instead. The bank is most likely going to finance 80% of so on a %75000 house it's $15k. If they gave you 10k down they would still need to come up with an additional 10k for the deoposit to qualify with the bank. The bank doesn't get the deposit, the seller does. When you exercise the option, the seller writes a letter to the bank with all the info about howmeuch deposit they have given, and how much in rent credits etc.

Cathy B gave a good explanation. and remember, you are the seller when it comes to the tenant/buyer, if you do a sandwich L/O or a plain L/O. it also helps to file a "memorandum of option" with the county recorder's office. apparently that makes it more "legitimate" in terms of having proof about the transaction and then keeping record of the payments as Cathy mentioned above. all that goes to the new lender when the T/B wants to cash you out and you have the proof of their payments, down payment, etc.

On our properties we have made it very simple, we draw up a regular lease with the information : house address & legal description, monthly rent, term,
etc. Then in the addendum we put in (1) the nonrefundable deposit/down payment is for the right to exercise the option to purchase the property at any time during the term of the lease for the purchase price of $ ________. (2) A rental credit of $______per month will be issued at closing & applied toward the purchase price of $ ________. (3) Any & all maintainance & repairs are the responsibility of the tenant buyer. (4) There are no contingincies regarding the purchase of this property. (5) If tenant/buyer exercises their option to purchase the property we will enter into a purchase/sales contract at that time.
We have found this works for us, everything in the lease as far as late fees, returned check fees, etc. are spelled out. If the tenant defaults on rental payments, we just start eviction proceedings & with the deposit it covers not only the fees but also the repairs of the property.
Keep in mind these are properties we own free & clear & we have not done a sandwich lease option yet.

I have 34 properties under this arrangement. The option consideration is non-refundable in the form of cash. This means that if they need to move during the term of the lease-option agreement, they get no money back.

If they exercise their option to buy, it can be done at anytime. I ask for proof they are applying for financing, before I prepare for the potential of selling the property. This also allows me the opportunity to be in contact with the lender.

The option consideration is credited back as part of their accrued down payment. Example, if they put up $5,000.00 option consideration and they pay $2000.00 per month with $1,000.00 per month credited back and they go one year on the agreement, then they have accrued $17,000.00 toward their downpayment.

It gets adjusted accordingly as the deal unfolds.

gceriai, you don't want to have ANYTHING in your lease agreement that refers to the option consideration at all. If your tenant/buyers were to challenge the agreement due to an eviction or something, A judge could consider the down payment a "term that excapes me at the moment" but means the t/b has an interest in the property and therefore cannot be evicted and need to be foreclosed on which is a much longer process.

I use 3 forms when I do a Lease/option: The purchase agreement, the option agreement and the lease agreement. The purchase and option agreements can refer to the terms of the lease but the lease CANNOT refer to the terms of the option or purchase agreement.

Dang I wish I could remember the term.........

That's interesting because we had a tenant default on the rental payments several months ago; did the eviction as per all the legal requirements here in Citrus County, Fl. & the judge not only ruled in our favor regarding the eviction, but also reiterated as per the lease, the deposit was non-refundable. They were then given 24 hrs to vacate & the sheriff's department sent a deputy to make sure the property was empty.

thanks everyone for the info, it's appreciated
Regards
Tom

What about the extra money they've paid per month? Is that refundable if they don't exercise the option or is it also non refundable?

"A judge could consider the down payment a "term that excapes me at the moment" but means the t/b has an interest in the property and therefore cannot be evicted and need to be foreclosed on which is a much longer process."
.............would that term be "equitable interest"?

"the judge not only ruled in our favor regarding the eviction, but also reiterated as per the lease, the deposit was non-refundable."
............I'm thinking this happened in small claims court? Asking for the return of a deposit when you are being evicted in small claims court is not the same as the tenants suing you for their equitable interest with legal representation in a higher court. By including the option in the lease agreement, you may be changing the tenant/landlord relationship to a buyer/seller relationship and have to use foreclosure rather than eviction proceedings. You may have gotten lucky with this tenant not knowing enough to pursue it. The above post is not to be intended as legal advice. Proper legal counsel should be sought for your specific situation.

Thank you everyone or all of your knowledge.

If the tenant does pay the rent, where in the heck would they get money to
sue in a higher court, lawyers want high retainers & charge $ 250 per hr. or more. Let's remember that the reason they're doing a lease option is they don't have enough money & good enough credit to buy in the 1st place. If they
could buy now they would, & get a better deal than waiting 2 or more years & paying the landlord an inflated price. That's the reason landlord's do lease options, to make money. We've seen lease option companies void agreements because the tenant was 1 day late on the rent. I'm not suggesting to be unscrupulous, but usually the best real estate buys are the 3D's ... Death, Divorce, & Distressed Properties !

The extra money that is allocated towards the equity each month; if they default is that also non refundable?

I know the arrangement I make. I cannot speak for others. Lease optioning is still a lease agreement until the option to purchase is exercised, then it becomes a purchase.

Money is never refunded because the monies paid monthly are technically rent/lease payments. You credit back a portion of the monthly payment and that money credited back is really the premium amount charged because it is a lease option. They are working toward ownership through the accrual method.

Lets say that you have a sfr where the market based rent is normally in the amount of 1000.00 per month. This means that other similar houses are renting in this amount.

Now lets say you charge 1500.00 per month with 3000.00 option consideration at the time of move in. Lets say they stay on year before exercising the option to buy.

At the end of one year, they have paid through accrual: 3,000.00, plus 500.00 at 12 months or 6,000.00. So the downpayment they have paid over one year is 9,000.00.

This is a great way to do real estate.

thanx for the reply.. I see the light a little bit brighter now. Is there anyone here from California doing lease options, are there different rules in different states?

Ron

"If the tenant does pay the rent, where in the heck would they get money to
sue in a higher court, lawyers want high retainers & charge $ 250 per hr. or more. Let's remember that the reason they're doing a lease option is they don't have enough money & good enough credit to buy in the 1st place."

......yup....and all they need is for Uncle Edgar to hear how they were taken advantage of by the real estate shark and he offers to front them the money to sue you for the equitable interest and legal expenses. Better to conduct your affairs on sound legal principles rather than what you think your tenant/buyer can or cannot afford to do. They may surprise you. Just because they are doing a lease option doesn't necessarily mean they have no money. Maybe they just strategically defaulted on a property and need time to repair their credit but still have good jobs and money in the bank. Maybe they are hedging the current real estate market not being sure where the market is going. Better to pay $5k for an option and be able to renegotiate the price than be locked in and $20k underwater again. I'm just sayin'.......

YES!!! Equitable Interest is the term I was looking for, Thank you. I agree with what you are saying. Maybe Uncle Edward is a lawyer.....you never know. It is very possible that your tenant buyer would be able to take you to court. My most recent "walk away" walked away from her 3k after 3mos. She had someone else call me pretending to be her asking for the money back. I told "her" that it was non refundable and she signed the agreement to that effect, and the "she" said things like "there was a really bad smell in the house and it made my kids sick" I mean honestly.... anyway I am half expecting to hear from a lawyer on her behalf. I'm counting on the fact that she was so disorganized that she won't even be able to find the lease agreement much less the PA and the option agreement. Our REIA president has been sued and he only gives his lawyer the lease agreement not any of the other papers.

I haven't done any deals yet, I'm a new investor and after reading all of your comments on Lease Options, I feel that I'm ready to do one. Thank you all very much for all the education it gave me courage to go forward.

Lani

that some people, who won't even fill out their "bio" on this site, or give their background experience in RE investing are whining about hypothetical lease options, when they should just get in the game & do something.
I don't pretend to know everything, but we've been flipping properties since before all the TV shows made it in "in thing"; & I'm not talking about wholesaling, I'm referring to bonafide RE transactions that if you check the county clerk's website there are 19 pages or 184 entries in our personal & corporation names. Dean sat right here in our house & told us the whole idea of this website was for students to help each other with shared experiences, that's exactly what we try to do ... between posts, answering PM's and phone calls. We make our money investing in RE, not talking about or pretending to invest in RE.

Congratulations on your good fortune in your real estate endeavors. It is admirable that you are trying to help and give back to those who are trying to emulate you. In fairness to those you post advice for when it pertains to legal matters, perhaps you might want to consider posting a disclaimer of sorts along with your advice.

Can anyone help me with using a lease option on a preforeclosure? I mean, how would it work in a preforecloure situation where, let say, the current owners FMV is upside down? Also, is it a must to put in a rent credit on every lease option, especilly if it's a situation where the tenant may not purchase? I ask that because here in my farm area in Hampton Roads Virginia there are many military renters who don't plan to buy because they'll be stationed somewhere else in a couple years.

Bravo, Bravo, Bravo. So very true.

To yadabnns:

We do a 2 part agreement for our L/Os. The first agreement is our general rental agreement which shows the monthly rental amount and always shows a security deposit of $1.00. The second agreement is our option agreement that shows their non-refundable purchase amount for their option agreement at our pre-determined price. It also shows that their option agreement expires at a certain date and/or their vacating the property, whichever is earlier.

Courts can construe the option fees as a security deposit sometimes if it is incorporated into a single agreement. With two agreements, and a specific amount for security deposit ($1.00), the option fee becomes untouchable.

To gceriani:

I am also amazed that the simple portion of the bio can't be completed by most members. I always think if they are so timid on this site where we are all here for learning, networking and are all friends; how can they succeed in the real world where the other person may be adversarial.

Hey all you lease optioners

This is an exit strategy I definitely want to do, though I haven't completed a deal, yet. Though my main strategy is wholesale and fix and flip (light rehab) until we get our feet wet and generate enough working capital to cover costs for the bigger strategies (you never know).

In reading this, it made me undersand I need to do more research and learning, especially from folks like you. Maybe in 3-6 months I'll be knee deep in L/Os. But, above water in all of them helping others rise to the surface ))

THANK YOU for your true wisdom and caring for others less fortunate than you (newbies, like me:))

Light it up!

20% down of $75,000 is $15,000 if already gave you $10,000 why the renter still need to give you another $10,000? Shouldn't it be only $5,000?

Is the additional rent portion refundable if the renter does not buy?
Who pays for repairs? For instance if the heater goes?
Does the home owner pay the insurance and taxes out of the rent or does the tenant pay those?
Should the down payment and additional rent be held until the person buys?

In Alabama it is not legal to accept more than one month rent as a deposit on a lease. If you combine the lease and option to buy you change the relationship. If the person defaults you now have to do an ejectment because they are no longer a tenant and they have a land interest in the property. That is why the lease and option agreements are kept very separate here. It may be similar in other states.
Lauri

* Buyers are often responsible for maintaining the property and paying all expenses associated with its upkeep, including taxes and insurance.

Partly answered.
Is this in addition to the rent payment? So,they pay $1000 rent and then taxes and insurance?
What if the toilet cracks and needs to be replaced?
Is that 'upkeep' or a repair?
What if the roof develops a major leak?
Lauri

On our lease options we pay taxes & insurance. This way we know they will get paid & on time.
We have the tenant/buyers inspect the property prior to signing the lease option, & explain they are responsible for any & all repairs/maintenance. This
way they take better care of the house. If it a large problem like a roof, central A/C etc. it is still their responsibility.