As I've written about so many times, I'm a huge believer in lease options as the best real estate investment vehicle available. It works great for both the seller and the buyer. The most important aspect of getting the deal correct is writing the lease option forms and contracts correctly. Here, I want to give you important tips on getting that paperwork correct.
When you are seeking to sell a property at the maximum price, a lease option is the way to go. Lease option forms and contracts define the agreement that both have when the tenant has an exclusive right to purchase the property during a defined period of time. Typically, the agreement is attractive to a potential homebuyer with credit problems that he or she needs time to work out before going to a mortgage lender for a home loan.
First and foremost, keep the lease and purchase option paperwork separate. If you don't, there is a real probability that the legal system will grant the lessee equitable value in the property even if he or she doesn't execute the lease option forms and contracts. What you want to be sure is included in the lease option is:
- Make sure the property is fully described. Include the street address along with the legal description. Describe the house for the number of bedrooms, bathrooms, and any out buildings such as detached garages and sheds. If there are multiple lots or acreage involved, be sure to specifically include what the sale price includes.
- Be sure to include the full legal name of the landlord and tenants. If there are multiple landlords and/or tenants with a right to purchase, include all full legal names. Include the landlord's current address, phone number, and other contact information.
- Clearly state the cost of the house and the responsibility for any and all closing costs that both the buyer and seller must pay. Optionally (not recommended) you can record how the future sales price will be agreed upon.
- Lease option forms and contracts need to clearly state the date the option expires. After that date, the seller has the right to sell to another buyer and the tenant could be required to move out. The length of the lease option typically lasts between one and three years but is fully negotiable between the landlord and tenant.
- Lease option forms and contracts are all based on what the tenant and landlord agree on. However, there is typically a security fee and an option fee involved. The security fee belongs in the lease paperwork as is standard in a lease agreement. The option fee belongs in the purchase option agreement and should clearly state that it is not refundable if the tenant fails to execute the purchase.
- While the lease option forms and contracts need to be kept clearly separate from the lease agreement, this paperwork must clearly include what happens if the tenant decides not to buy. In almost all cases, the option fee is forfeited (this is separate from the security fee). Other things that need to be addressed include any maintenance investments or improvement costs the tenant makes to the property.
- One of the big advantages of the lease option forms and contracts is the landlord often passes on responsibility to the tenant for most maintenance and repairs. Typically, if a furnace burns out, a roof begins failing, or other major repairs are needed the landlord is still financially responsible. However, replacing faucets, tightening loose hardware, unplugging toilets, keeping the yard in good shape, and other small maintenance and repairs become the responsibility of the tenant. The degree of responsibility is fully negotiable and should be accurately recorded in the lease option forms and contracts.
Before writing the lease option forms and contracts, be sure you know the legal requirements in your state and local.
By Wendy Patton
For more than 30 years, I've used the Sandwich Lease Option System to earn myself and my students millions of dollars. From my experience, I know there is plenty of room and opportunity in the real estate investment market for everyone wanting to participate to find profitable deals. It's because of that fact and my personal success that I share the Sandwich Lease Option System with others.
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