The lease agreement with an option to buy has definitely become a popular and effective way for under qualified buyers to begin the purchase process and begin putting down money that applies towards the down payment. The lease agreement with an option to purchase is also good for sellers wanting to maximize the selling price.
Both the seller and the buyer should always enter into a lease agreement with the option to purchase with a wholehearted attitude to complete the sale. Unfortunately, in the real world, sometimes agreements of all types can’t always be completed. Here, I show both sellers and buyers ways to structure the lease agreement and the purchase option to protect their interests in the property should it become impossible to complete the sale.
Lease Agreement Protection for Buyers
If a seller tries backing out of a lease agreement with the option to buy, the buyer can always sue the seller to force him or her to complete the deal. But that costs a lot in legal fees and can take years to push through the legal system. Fortunately, there are better options.
I’m going to give you multiple ways of protecting your lease agreement with option to purchase. You don’t need all of them. Typically any one of these will do the job. Still, I’m not giving legal advice. I’m not an attorney. It’s strongly recommended that you seek legal advice from a qualified attorney with full knowledge of the laws in your state.
- Officially record the lease agreement and purchase option. The easiest way to do this is have the paperwork notarized and then recorded in your local public real estate records. If your paper work wasn’t notarized, you can sign an affidavit called a “memorandum of option” and have this filed with your local public real estate records. Neither of these gives you legal right to the property or creates a lien but it does “cloud” the title, making it more difficult for the seller to sell to someone else.
- Escrow the deed. This is one that you probably want to do in addition to recording the lease agreement with option to purchase. Escrowing the deed with a title company enables the title company to complete the sale when the time comes if the seller has died or can’t be found.
- Record a mortgage. This is typically associated with securing payments on a promissory note. However, a mortgage can be used to secure performance on any agreement, including a lease agreement with an option to buy. If the seller fails to perform, you should be able to foreclose on the mortgage to take possession of the property.
Lease Agreement Protection for Sellers
Tenants or want to be buyers don’t always agree to move on when they fail to perform to the terms of the lease agreement with option to purchase. They may try convincing a judge that they have equitable interest in the property. Here is what you can do to dissuade a judge from agreeing with them.
- Keep your lease agreement and option agreement completely separate. The lease agreement should never mention the option agreement.
- Keep the length of the option period short. No more than one year. If the buyer needs more time, allow for a renewal of the lease agreement with the option to purchase.
- You need to continue paying the taxes and insurance. You can collect it through the rent but these need to be paid in your name.
- Collect a security deposit along with the lease option (give separate receipts). You can make the security deposit small but what you are showing is that landlords require security deposits, sellers don’t.
- Carefully consider how much “rent” you’re going to credit towards the down payment. The more “equity” the seller can show a judge, the more likely the judge is going to side with the tenant/buyer.
Following some or all of these methods protects both the seller and buyer in a lease agreement with the option to purchase. Of course, it’s always best when you complete the deal according to the terms of the contract.
If you want to work directly with me on the lease agreement with purchase option business model or any of the other investing models that have proven highly profitable, please join me at www.wendypatton.com/what-is-wendy-pattons-inner-circle.
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Several times each week, I make the most current real estate investing information available to readers. This time, it’s about the lease agreement with purchase option investing model but the information I provide changes constantly to stay current with the market. Be sure to check back at: www.wendypatton.com. Also, get started learning how to do NO CASH lease options on real estate by picking up a copy of my bestseller book: Investing in Real Estate with Lease Options and Subject-to Deals.
By Wendy Patton
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