The Basics on Lease-Option (Rent to Own)

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In today’s real estate market, both buyers and financing are scarce. These market pressures have increased the popularity of alternatives to the purchase and sale of a home, such as lease-options (also known as “rent to own”).

A lease-option is like a simple lease, in which a tenant rents a house from a landlord and pays monthly rent and expenses; however, the “option” locks in certain terms for the future purchase of the home by the tenant. The terms and conditions of the “option” can vary widely based on the negotiations between the parties. For example, at the outset of the lease-option, the tenant pays a deposit toward the “option” to purchase the house at a specific, agreed-upon price; that deposit is potentially credited toward the purchase price if the tenant “exercises his option” at the end of the term by purchasing the home on the agreed-upon terms. During the term of the lease, the tenant pays monthly rent for a specific length of time.

There are positives and negatives to a lease-option for both the owner (landlord) and potential buyer (tenant) of a house. An owner-landlord receives the financial benefit of monthly rent, plus a deposit (refundability determined by the parties); further, he secures a potential buyer and specific terms upon execution of the lease-option, potentially allowing for a successful sale with a buyer who may otherwise be unable to close. A buyer-tenant is able to get settled in the home he wishes to purchase, with the security of an established purchase price, while obtaining extra time to secure his financing.

Conversely, in a lease-option, an owner becomes a landlord with traditional landlord worries and responsibilities, and may be creating a potential cloud on the title should the tenant’s purchase fall through. Likewise, a potential buyer becomes a tenant with the responsibilities and restrictions defined in the lease-option, and he may forfeit his deposit should he choose not to purchase the home.

Lease-option is a creative alternative for a seller and buyer that are having difficulty finalizing a sale in today’s trying—but temporary—real estate market.

Please note that each state has its own laws which affect lease-options. Protect and inform yourself before proceeding. If you are considering a lease-option or want to learn more, consult an attorney licensed to practice law in the state in which the purchase/ sale of property will occur.

Editor’s Note:
Stephen E. Spira is an attorney with the Melbourne, Florida, firm of Spira, Beadle & McGarrell, PA (www.spiralaw.com)

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