As a huge believer in the lease to purchase investment method, I’m adamant about writing the lease option forms and contracts in an ethical and straightforward manner. Even if you’re working on your first lease option deal, you have much more knowledge and information about the process than the typical tenant/buyer. After all, you’ve thoroughly studied the subject while this is most likely a new and novel opportunity to the first time buyer.
You will enhance your reputation, your business’s reputation, and the integrity of each deal when you make sure the buyer fully understands the legal structure of the deal and the obligations of all parties to the lease option and contracts. A good way of firmly impressing this on buyers is by starting each contract with a statement similar to:
This is a legally binding document. If you desire legal or tax advice regarding this Lease Agreement with Option for Purchase, including all addenda, and attached exhibits (collectively referred to below as this “Contract”), you are advised to consult with your attorney or tax adviser prior to signing this Contract.
Major Components of Lease Option Forms and Contracts
A lease option contract is made up of two agreements: a standard lease agreement and an option to purchase contract. These should be written as two separate documents.
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. 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.
Details of Lease Option Forms and Contracts Count
While this is not an all-inclusive checklist of what needs to be included in lease option forms and contracts, it is a good beginning.
- 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.
Additionally, include appliances and fixtures that will or will not be part of the sale. These include stoves, refrigerators, air conditioners, and anything else that could later be contested as being part of the sale.
- 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. Use a clause similar to: “As of midnight on Date, Year, the purchase offer fully 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 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 and describes under what conditions it will be retained or returned. 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 and/or if it will apply towards the purchase if the purchase is completed.
- 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.
- The lease (separate from the purchase option contract) needs to detail rules that the landlord requires the tenant to abide by. These might include no pets, no loud music, no illegal activities, etc. Once the tenant/buyer completes the purchase they are free to use the property as they see fit but until then, it is still owned by the landlord.
- 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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